Major Global Events
Global Market Returns Q3 LTM
MSCI World Equity Index 5.3% 12.3%
MSCI Emerging Market Index 0.0% 2.7%
BB Global Aggregate Bond Index - 0.9% - 1.3%
- Brexit deal close however parliament challenging
- Italian budget spooks European bond market
- New NAFTA agreed but US/China trade war escalates
- Global equity market advance over the quarter
A Brexit deal is close however getting parliament approval will be challenging. The cross-party and intra-party divisions makes getting the likely “Soft Brexit” deal through parliament a significant challenge for Theresa May. Appeasing Northern Ireland’s DUP and Tory Eurosceptics as well as getting a number of Labour MPs to switch allegiances will be extremely challenging. Labour may seize the opportunity and vote down the deal in the belief a general election will be called, paving the way for a Corbyn government. In the event that “No-deal Brexit” is achieved, the UK would automatically move to higher tariff World Trade Organization (WTO) rules, however it may at least provide some certainty to companies and investors instead of the current uncertainty that companies are currently trying to navigate.
Italian Budget proposal spooks European bond market. The Italian coalition government agreed to a proposed budget deficit of 2.4% of GDP for 2019, up from 0.8% previously announced. It is comfortably within the 3% ceiling permitted by Brussels, however is contrary to Rome’s agreement with the EU that it would seek to cut its deficit. Yields on Italian government bonds (BTPs) rose as the market contemplated higher deficits and higher debt levels within Europe’s most indebted country. The budget proposal will need to navigate several safeguards built into the constitution before becoming law. Interestingly, recent polls suggest support for the Euro and EU has increased since the new populist government was established. So, the situation is complicated but not as negative as it appears.
Trump administration renegotiates NAFTA however imposes further tariffs on China. The Trump administration announced tariffs on $250bn of Chinese imports and in response, China retaliated with tariffs on $110bn US imports. Trump has threatened a further $260bn if a deal cannot be struck, imposing tariffs on effectively all Chinese exports to the US. The tariff rate is also scheduled to increase in January 2019 if no deal is reached. The worst-case scenario would lead to a meaningful drag on global economic growth whilst pushing the price of goods higher. However, trade negotiations haven’t been all bad news, with a new NAFTA deal announced involving US, Mexico and Canada renamed USMCA, which covers £1 trillion of goods per year. The next 6 months are pivotal for global trade as we are forecast to have a finalised Brexit deal and the US/ China have a January deadline to secure a deal to avoid all trade volumes between the two countries exposed to higher tariffs.
Global equity market advance over the quarter, however government bonds decline.The MSCI World Equity Index advancing +5.3% in local currency terms, driven solely by US equities, however Emerging Markets were weighed down by tighter US monetary policy as well as concerns about the potential impact of global trade tensions. At time of writing global equities have started the fourth quarter negatively with a fall in global equities and bonds. Strong US economic data, higher inflation and some hawkish although misconstrued comments from FED chairman, Jerome Powell, caused a sharp fall in equity markets as bonds yields rose. The recent sell-off is similar in nature to the January/ February sell-off and we expect markets to return to growth over coming months. Markets remain volatile around the US-China trade however we believe a deal will be reached, which will reduce uncertainty, improve investor sentiment and support risk assets.
"It is not the strongest or the most intelligent who will survive, but those who can best manage change.” - Leon C. Megginson