Major equity indices head higher in January erasing some of the negativity seen in the last quarter of 2018

Synopsis of the week

• Although most of the Geopolitical problems we saw in 2018 persist, equity markets have been able to shrug off the negative sentiment at the start of the year.
• Fed Chairman, Jerome Powell, has overseen a shift in policy thinking in the last few weeks. As inflationary pressure in the US has eased, currency markets are now factoring in just one further rate rise in 2019 having previously expected three.
• Both the US and China have made encouraging statements about trade negotiations but reaching a mutually agreeable point before the March deadline looks unlikely. We expect that with progress being made an extension to this deadline will be agreed upon, avoiding an increase in tariffs.  

Press coverage

On Wednesday evening, Fern Wealth’s Director of Investment Management, Alastair McCaig, joined Bloomberg anchors Jonathan Ferro and Guy Johnson. In this week’s show, they chatted about Brexit, Germany economic growth outlook, Italian politics and what to expect from the US Federal Reserve and Jerome Powell’s speech.

Click here to listen to the interview on Bloomberg

The price action of equities in the first month of this year has shown remarkable similarities to those seen in January 2018. Context is everything and the moves higher this year are clawing back some of the sell-off seen in December last year and not setting higher highs.

As we stated in our year ahead review, most of the geopolitical issues that hung over markets last year have not been fully resolved and continue to cloud our outlook. The fact market investors are still analysing these same issues has helped reduce some of the volatility we saw as developments appear less severe.

The latest statement from the US Fed has seen market expectations shift on what the rate path will be. At the start of the fourth quarter in 2018, the perception was we would see three rate rises by Jerome Powell and his team this year. Following the shift in phraseology and the use of “patience” in the last statement, we are now only looking at one rate rise this year, a positive for equities.

Brexit debate and confusion remain, but we are getting closer to the March deadline and with time running out, it is beginning to look like the UK will agree to the current Brexit deal on offer. This is not a good deal for either the EU or the UK but if pushed through it will at least let both turn over a page and start to look forward again.

The last six weeks have seen China and the US try to negotiate a mutually agreeable deal, however, the start points for these negotiations were quite polarized and it is unlikely we can see both parties happy by March. That being said, we have seen enough progress being made that a postponement to the tariff increases pencilled in for March can be delayed allowing negotiations to continue.

We are already into the first week of the latest reporting season. At this point, we have seen quite a mixed bag of results from those businesses that have reported earnings. Having seen three quarters in a row with a growth of over 20%, it is less likely we will see this replicated again. Unemployment levels remain low on both sides of the Atlantic and earnings continue to pick up which is helping demand. With economies cooling and confidence being eroded, we are expecting less impressive data once all companies have updated the markets.