Weekly market recap – Deal on, deal off

Heightened intra-week volatility as markets react to trade war developments.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 22nd November 2019

It appears the magic money tree may actually exist! On Monday, a man from Blackhall Colliery, County Durham, handed in £2,000 in cash which he found on a pavement. Rather bizarrely, this is the 12th occurrence to have been reported in this particular village since 2014 and the fourth time this year!

Sadly the magic money tree didn’t rain down on the markets, with equities etching out meagre returns. Asset class returns in sterling and local currency are below; while the tables look like it was a quiet week in the markets, there was heightened intra-week volatility as markets reacted to trade war developments.

Table 1: GBP total returns

Source: Bloomberg

Table 2: Local CCY total returns

Source: Bloomberg

While the UK populous continues to be bombarded with spending pledges and promises for a brighter future, traders and investors have had a wild week as their attention has been drawn by news, facts, rumours, leaks, speculation and fake news. With the start of the US-China trade war approaching its two year anniversary, the two economic superpowers continue to create headlines as neither side wants to appear as if they are giving ground. Politically, there is very little appetite at home for either side to take a soft stance with the other. This is more obvious in the US where taking a tough stance against China is one of the few issues uniting both Democrat and Republican politicians. This was evidenced last week by both the United States House of Representatives and the Senate unanimously passing a bill which would require the US Government to impose sanctions against Chinese and Hong Kong officials responsible for human rights abuses in Hong Kong.

Chart 1: Intra-week volatility was heightened as conflicting headlines pulled markets one way and then the other

Source: Bloomberg

This setting has left markets in a tense state ahead of “phase one” of the US-China trade deal which the two sides say is close to completion. But with sentiment continually oscillating, the heightened volatility continues to bounce markets between gains and losses as each side tries to control the narrative. Before the US market even opened on Monday last week, CNBC’s Beijing Bureau Chief was tweeting that the mood in Beijing was “pessimistic” after the US president said there would be no rollback of tariffs. Within hours, however, Fox News was reporting that the US would extend licenses which would allow US firms to continue doing business with Huawei, the Chinese telecommunications at the centre of the 5G revolution.

The next choppy market conditions were on Wednesday when an article from Reuters reporting that the “phase one” agreement of the US-China trade deal might not be finished this year. In response, the editor-in-chief of China’s Global Times tweeted an incendiary quip that China is ready for a full-blown trade war. In somewhat of a de-escalation, markets rebounded from their session lows as China’s top trade negotiator said he was “cautiously optimistic” at the prospect of a deal.

Chart 2: The negative impact on global growth from the US-China trade war has come through in industrial production figures for manufacturing-heavy economies

Source: Bloomberg

So where does this leave us? Though developments in this saga are still coming in, Reuters reported on Sunday that China is planning to introduce stronger protections for intellectual property rights. While nothing has yet been finalised by trade negotiators on this topic, it would represent a significant concession by the Chinese as IP theft has been a key sticking point with the US negotiators. All is still to play for…

STAT OF THE WEEK: 2% – Estimated proportion of global CO2 emissions due to aviation (International Air Transport Association).

Data correct as at: 22/11/19

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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