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Smartim Weekly Market Review

04 January 2019
Smart Investment Management 
The week to date as at 12 p.m. Friday (GMT).

Markets and key events

Market gloom

Markets in the new year have begun very much where they left off, gloomy, as investors fret about several risks on the horizon.  The risk of recession, the risk of a further escalation in the US China trade war, the risk of a hard Brexit, the list goes on. This has led safe assets to rally, whilst equity markets continue to struggle.  It has been further exacerbated by a leading economic indicator pointing to contraction within China’s manufacturing sector, as the Caixin-Markit manufacturing purchasing managers indicator dropped to 49.7 in December (any number beneath 50 indicates contraction).  This was followed by Apple issuing its first sales warning in 16 years, blaming a combination of consumers less willing to update their smartphones and the company under estimating the extent of the economic slowdown in China.  Shares in Apple fell 10%, wiping £53 billion off its market value. 

Anxiety arrested by the prospect of US China trade talks and easing of Chinese lending conditions

Anxiety rippled around global markets, finally being arrested on Friday by the prospect of further talks between China and the US on the ongoing trade war, and the People’s Bank of China announcing a cut to the required reserve ratio for commercial banks, effectively easing lending conditions.  The subsequent equity market rally helped lift the Chinese CSI equity index off a 3-year low.  This was further reinforced by the release of a rare piece of positive economic news, as the Chinese Caixin Services Purchasing Managers Index rose to a six-month high for the month of December.

US futures markets pricing in a greater probability for a rate cut

At 1.30pm today, London time, the latest US non-farm payrolls will be released, with an expectation for a further 177,000 jobs to have been created in December.  This is followed by a speech by Jay Powell, Chairman of the US Federal Reserve in Atlanta, which investors hope will provide further clarity to US monetary tightening over the course of 2019.  US Fed funds futures markets are now pricing in a greater probability of a US interest rate cut this year, versus further rate rises.

Equity markets mixed

Over the first three days of the year up to 12pm London time, the US S&P 500 index is down 2.4%, emerging markets down 1.7%, Eurostoxx 600 up 0.4%, UK’s FTSE All Share up 0.8%, Japanese Topix down 1.5%, Australian S&P ASX 200 down 0.5% and the Chinese Shanghai Composite is up 0.8%.

Support for safe havens

Within fixed income markets, government bonds have rallied, leaving the yield on 10-year German Bunds at 0.19%, US Treasuries 2.6% and UK Gilts 1.3%.  Gold has rallied to $1,292 an ounce and Brent crude oil is currently trading at $57 a barrel, almost 6% higher from the end of last year.

Issues under discussion

Last year euphoria

A brief thought.  This time last year, investors were almost uniformly bullish, if not euphoric, following the announcement of US tax cuts, after 2017 had been the first year where the global economy had experienced synchronised growth since the financial crisis.  What followed were concerns over an overheating US economy, leading to series of interest rate rises in the US and central banks embarking on the withdrawal of quantitative easing.  This combined with the US China trade war beginning in earnest, left investors second guessing when the next recession will hit.  2018 for equity markets turned out to be the worst year since the 2008 financial crisis, and the eighth worst year since 1970, and one of only 14 of the last 48 years to end with a loss for global equities.

This year bearishness

At the beginning of this year, there is a definite bearishness to markets, yet many of the ingredients to suggest a recession is around the corner are not there.  If Trump measures his presidential success by the economy and the stock market, perhaps we have seen the worst of the US Chinese trade war. And the US stock market is now trading on a historic price to earnings ratio of 16x, having traded as high as 24x.  Although inflation has been rising in the US, it has not reached problematic levels, and this provides good reason to believe that we could see a turning point in the US interest rate cycle this year too, despite the very tight labour market.  Perhaps 2019 will not turn out as bearish as it feels today.

Smartfunds exposure ratcheted down

In the meantime, the volatility overlay on the Smartfund range has ratcheted market exposure down to 59% for the Protected Growth and Protected Balanced fund and 49% for the Cautious fund, helping to limit any further scope for losses from here.