Weekly market recap – Boris bounce blusters

Positive news for risk assets as phase one of the US-China trade deal was signed by US and Chinese officials in Washington.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 17th January 2020

For the regular readers among you, you might remember from my piece last year that today is Blue Monday, the most depressing day of the year. This year, to combat the looming sense of foreboding or woefulness, the head of operations at Sea Life London Aquarium has invited Londoners to “ditch their duvets” and set up a workspace in a designated “Deep Blue Monday” zone beside an ocean tank. The aquarist said “what better way to de-stress than getting nose to fin with awe-inspiring creatures who peacefully glide by such as green sea turtles, rays and sharks?”

Equity markets on the other hand are clearly feeling chipper as markets across the world closed yet again at fresh highs. Asset class returns in sterling and local currency are below; last week was positive for risk assets as phase one of the US-China trade deal was signed by US and Chinese officials in Washington.

Table 1: GBP total returns

Source: Bloomberg

Table 2: Local CCY total returns

Source: Bloomberg

Like much of the developed world, the UK faces an economic environment starved of significant growth in productivity, GDP or inflation. Monday’s official GDP figures showed the economy in November to have expanded just 0.6% versus one year previous, the weakest level of growth in over seven years. While it is too early to make a judgement for sure as to whether economic momentum in the UK has turned (particularly in light of the general election result which clears some of the political uncertainty), investors and economists suspect that the Bank of England may take the slowdown as a reason to ease policy. This is most evident from the probability implied by the market for a rate cut shown below.

Source: Bloomberg

Indeed, the past week has seen the Bank’s Governor Mark Carney – who is due to step down from his position in March – and two other members of the Monetary Policy Committee indicate a rate cut could be required if existing assumptions for the UK economy prove to be over-optimistic. With two further members of the Committee having already shown a preference for a rate cut, this means that five of the nine voting members of the MPC could indeed now favour cutting the UK’s base rate to 0.5%. Unsurprisingly, both sterling and UK government bond yields have fallen in response to these developments.

As the chart below suggests, the question is whether the UK has entered a prolonged downward trend in economic activity, or whether we are experiencing a rebound from recent lows.

Source: Bloomberg

Some commentators are now pointing to the conundrum that Andrew Bailey – current head of the Financial Conduct Authority and incoming Governor of the Bank – will inherit in which he will have little room to make any further rate cuts to help combat weak growth when he takes over in March.


STAT OF THE WEEK: £15.7 billion – the estimated value of 5G to the UK economy by 2025 (Barclays).

DATA CORRECT AS AT: 17/01/20

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About the author: Tertius Bonnin

Tertius joined EQ in 2016 and is responsible for covering investment ideas within US, Global and Thematic equities. He sits on the fund selection committee and also supports the portfolio managers across a range of other responsibilities.

He passed Level I of the CFA exam in 2018, holds the Investment Management Certificate and has a BA in Business with Finance. He enjoys a variety of sports including skiing, cycling and running – and when not in the office he experiments with Asian cuisine.

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