So…where to from here?
We have been of the view that equity markets will remain supported by a reasonable growth backdrop and accommodative policy. The rapid spread of coronavirus raises risks of widespread economic disruption which could push major economies into recession. This, however, is not yet our base case. Investors had recently viewed the dovish moves by the likes of the US Federal Reserve and the European Central Bank positively, considering the reduction of interest rates as warranting higher valuations on future earnings, despite the increased risks.
Trade’s all the rage
Noise at the macro and political level continues. With the US and China agreeing a Phase 1 trade deal, a ceasefire in tensions does seem likely for now, but further concrete progress remains uncertain as the coronavirus is currently limiting China’s ability to deliver on new import targets, while Trump has an incentive to appear tough on China during the election – which is a whole other challenge in itself, with potential market volatility ahead.
The détente with China has allowed Donald Trump more time to focus his attention on the trade situation with Europe. Business leaders on both sides feared he would ramp up his aggression here, but in actual fact the president took quite the opposite stance, declaring his expectations of negotiating a deal before the presidential election in November. Talks are under way, with both sides promising to work quickly towards a deal.
Closer to home here in the UK, Boris Johnson’s landslide victory in the general election late last year brought about a marked fall in Brexit uncertainty, and a Brexit deadline passed without extension at the end of January. However, there is still much to be discussed as the UK and EU begin intense negotiations around their future trade relationship, with a deadline of the end of this year for the details to be finalised. Many in the EU believe the UK is being over-ambitious with this deadline, and that Boris should extend it by a year or two. The prime minister must decide by July whether he wants an extension, and so far his answer has been no.