Global equity markets rallied in local currency terms through October on an improving rhetoric around the US-China trade war and a third interest rate cut by the Federal Reserve.
The trade war has remained the big wild card for investors, and so any signs of progress in negotiations were sure to be greeted positively by equity markets. Over October it emerged that the two sides were close to agreeing the shape of a ‘phase one’ trade deal, which would see tariffs start to be scaled back in stages. This temporary pact remains a significant distance from an end to the issue, and given the characters involved there is significant scope for the current optimism to fade. However, it is clear that Trump needs the economy to be in good shape heading into next year’s election and Chinese authorities have thus far indicated a willingness to engage.
October also saw the Federal Reserve cut interest rates for the third time this year. Monetary conditions globally remain very supportive and the trend lower in bond yields that started last year should eventually prompt corporate profit growth to re-accelerate and encourage a further advance in equity markets. However, despite the US rate cut in October, global bond markets weakened over the month as confidence in the economic recovery improved and investors price out the likelihood the Fed will continue to cut rates this mini cycle.
Closer to home more clarity emerged on the outlook for Brexit. EU leader’s approved Boris Johnson’s amended withdrawal agreement and then extended the Brexit deadline until 31st January next year under a ‘flextension’ agreement. Subsequently a general election has been scheduled for 12th December, and so the debates over ‘what now’ for our Brexit policy are only just beginning. However, the developments over October essentially removed the messy “no deal” scenario from the equation, which resulted in a significant rally in sterling as this priced in. The rally in sterling provided a headwind to the UK equity market returns, as it weighed on the internationally exposed businesses in our index.
The discussion has focused on the local currency returns for the various markets but, given the outsized move in sterling over the month, the outcome from a sterling investors point of view was very different. Overseas equity markets, which performed well in local currency terms, fell marginally when converted back into sterling at the higher rate. This highlights the risks that sterling strength can play in a globally diversified portfolio but looking forward it is hard to envisage a pound-bullish scenario that will emerge from the upcoming election.
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