Markets have continued their 2019 gains since the broad market sell-off in Q4 2018. However, political developments are starting to affect main market indices. Primary factors include Britain’s ongoing tumultuous exit from the European Union, the pending U.S.—China Trade War resolution and rising geopolitical tensions.
Britain’s headlines and markets are dominated by the ongoing negotiation to conclude Brexit, with further complications arising with Theresa May’s decision to resign as Prime Minister, and a Conservative Leadership contest on the books to find the new PM, who will have to find Parliamentary consensus or risk a forced action.
The FTSE 100 (Britain’s benchmark index) posted -2.9%, softened by Sterling devaluing by 3.3% against the U.S. Dollar. This lifts the FTSE’s value, as approximately 70%+ of its constituents’ earnings are derived from overseas, which increases their value when converted back into Sterling, the opposite occurs if Sterling’s value increases.
The biggest news in the U.S. was the breakdown in negotiations with China, to resolve their ongoing Trade War and a tit-for-tat ensuing. The latest round saw the U.S. increase tariffs on $200bn of Chinese imports from 10% to 25%, with China retaliating by increasing theirs from 5%–10% to 5%–25% on $60bn of U.S. imports.
Consequently, equities suffered the most over the month with the S&P 500 (U.S.’s benchmark index) down 3.2% in Sterling. The U.S. Federal Reserve is dovish on interest rate rises, markets are now pricing for U.S. rate cuts resulting in falling bond yields but higher bond prices, with the U.S. 10 Year Treasury up 3.6% in Sterling.
Europe was a mixed bag, with exporting data flat but consumer confidence and projected GDP growth for Q1 2019 increasing above expectations to 1.6%. Europe ex-UK equities fell 4.8%, and employment grew to 1.4%.
China’s primary impact is as a result of the aforementioned U.S.—China Trade War, their inability to agree a mutually acceptable trade deal will likely result in weaker Chinese GDP Growth forecasts. The immediate impact of the new tariffs has been offset by a fall in Yuan against the U.S. Dollar by 2.5%. China’s Government has the power to stimulate its own economy, if the tariffs become too burdensome, through various means.
In summary, the market outlook for 2019 so far is positive, particularly considering the sell-off that occurred in late 2018. Various geopolitical risks yet to be resolved will determine markets monthly movements.