The Multi-Asset Process

January 2020 Market Review

December’s developments continued into the New Year as we saw posited moves on trade and Brexit come to fruition but events in Iran and then news of a deadly respiratory illness in China dented sentiment as the year of the rat begins.

Against this backdrop, there was another in a long line of market records over the month, with technology stocks leading the charge in the US as Alphabet’s market valuation hit $1 trillion for the first time while Tesla became the latest member of the $100 billion club.

On the Brexit front, we finally saw the UK leave the European Union on 31 January, with Boris Johnson claiming the country could now put "years of rancour and division behind it". From 1 February, the UK enters an 11-month transition period during which it will continue to follow EU rules but without representation in the bloc's institutions – and there remains a risk of a no deal if it is not possible to reach agreement on a range of areas. Trade is obviously first and foremost but other areas include security and intelligence co-operation, fisheries, data, education and research collaboration.

As things stand, we know very little of the plans for the negotiations and scrutiny of the actual mechanics of Brexit has been restricted. Negotiating mandates setting out wishlists and red lines are usually published by both sides before any trade talks but parliament’s involvement in approving the mandate was removed from the Brexit Bill and early speeches from Johnson and the EU’s chief negotiator Michel Barnier shows the gulf between the two sides.

Worryingly, Brussels has already mentioned the dreaded tariff word, and we could see any post-election positivity ebb away quickly in the coming months – particularly if the Prime Minister carries on his apparent attempts to alienate the entire press corps.

Meanwhile, in Mark Carney’s final meeting as governor, the Bank of England’s Monetary Policy Committee (MPC) voted 7-2 to keep rates unchanged, citing an improving global backdrop and reduction in uncertainty following Johnson's election victory. This was despite markets pricing in a 50/50 chance of a rate cut and, reflecting that, the MPC said it remains poised to reduce rates if a post-election bounce fails to materialise.

The Bank also warned Brexit uncertainty has harmed the UK's long-term prospects: weaker growth at the turn of the year is expected to drag overall economic growth down to just 0.75% in 2020, falling from a projected 1.25% last November.

The US’ Federal Reserve has also kept its key rate unchanged and signalled policy would stay on hold. Treasuries extended their gains over the month as Fed chair Jerome Powell said the Bank had revised its language around inflation to clarify that policymakers are not comfortable with the rate falling below 2%.

Digging into the phase one trade deal between the US and China in more detail, China has pledged to boost US imports by $200 billion above 2017 levels and strengthen intellectual property rules while the US agreed to halve some of the new tariffs it has imposed on Chinese products.

At a signing ceremony in Washington, President Trump said the deal sets the stage for a stronger relationship between the US and China while the latter’s Vice Premier Liu He agreed the agreement was rooted in "equality and mutual respect".

For all the fanfare, however, it should be recognised that the US will maintain up to 25% tariffs on an estimated $360 billion worth of Chinese goods while China, which has levied new tariffs on $100 billion worth of US products, is also expected to maintain the majority of these.

Tariffs remain on around two-thirds of the goods Americans buy from China and Washington's fundamental complaints about Chinese business practices remain unresolved.

Highlighting his perennial maverick tendencies, Trump said
all tariffs would be removed if a phase-two deal is completed but officials, including US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin, added that no agreement has been reached on tariff rollbacks.

In other Trump news, the President broke his own record for the most tweets in a day, firing off 132 nuggets of wisdom as he returned to the US from Davos.

Speaking of Twitter, we often talk about the importance of ignoring market noise in these commentaries and the rise of social media is clearly making this harder and harder. UBS CIO Paul Donovan said in a tweet that social media is good at spreading fake news quickly: fake news is 70% more likely to be retweeted and it takes the truth six times longer to reach the same number of people.

With the recent outbreak of Coronavirus in China, for example, many are naturally drawing comparisons to SARS in 2003. But the economic cost of a virus is generally from the fear of the disease, not the disease itself, and 17 years ago social media was essentially non-existent. Donovan believes social media today gives more opportunities to spread fear, and this may lead to costly economic change in the months and years ahead.

For a comprehensive list of common financial words and terms, see our glossary here.


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Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

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Tuesday, February 11, 2020, 1:19 PM