Markets are seeking reassurance on a range of geopolitical issues. But these issues may be too complex to succumb to easy solutions. Expect further volatility ahead as trade tariffs, Brexit, Italian and other worries continue to cast a shadow.
1. Market scepticism about U.S./China trade negotiations will prompt market volatility, until there are signs of consensus.
Global markets rallied at the start of this week following apparently successful talks between Presidents Trump and Xi at the G20 summit on Saturday. But reassurance quickly turned to scepticism as investors picked over the sparse (and conflicting) details of what had be agreed to, and considered what was realistically possible. U.S. markets came down with a bump on Tuesday (see page 2) but problems lie more heavily on European stocks (page 6) and in particular German companies (page 4). We doubt that it will be possible to reach comprehensive agreement within the stipulated 90 days on the multiple issues supposedly touched on by the deal, but the markets will probably find some reassurance in any evidence of broad consensus in the most important areas. But while we wait for this to emerge, expect more market volatility.
2. Political machinations around Brexit have hit both GBP and the FTSE 100: various outcomes are possible, but fears will persist.
Meanwhile, the markets remain bemused by the Brexit process, with Mrs. May now experiencing very heavy weather as she attempts to pilot the proposed withdrawal agreement (WA) through the House of Commons. The political situation remains extremely fluid and while a smooth or soft Brexit remains technically possible, other options (e.g. a second referendum, early elections) are also increasingly discussed. GBP, as ever, is the conduit for market uncertainty, trending down from GBP/USD of 1.31 in early November to a rate of 1.28 now. What is interesting is that the FTSE 100 has also declined sharply in recent days: previously, a weaker GBP had tended to support its export-oriented constituent companies. Markets are unlikely to find much comfort here in coming weeks as any moves to a possibly more market-friendly outcome may well be accompanied by increasing risks of a “hard Brexit” outcome if the political decision process threatens to break down.
3. Evidence of supply controls could help push oil prices higher over the longer term, but demand concerns have been a dampener.
Market uncertainties have been reflected in further downward pressure on German Bund yields (page 4). Gold prices have also moved higher in recent days, although rising yields may limit any further upside. Global growth worries have hit oil prices in recent months, but they have stabilized this week, on hopes that the meeting between OPEC and its allies will control the supply situation (page 8). We still believe that oil prices are likely to increase on a 12-month horizon, but markets may need more evidence to be reassured this is indeed the most likely outcome.
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