Market Review May 2019 (covering April)

Stock markets had another solid month in April, building further on the progress so far in 2019.

Market Review May 2019 (covering April)
Ermin Fosse

Ermin Fosse

________

Trump That?

  • US administration indicates the US and China are closing in on a trade deal
  • More pain on the high street, but UK retail sales rebound in 2019
  • Credit growth slows
  • US and EU threaten tariffs in ongoing WTO case about Boeing and Airbus subsidies
  • US economy grew by 3.2% in Q1 2019 easing fears of a slowdown
  • EU grants the UK a six-month extension to Brexit until October 31st
  • Germany cuts its economic growth forecast for 2019 and 2020
  • ECB to consider if the effect of negative interest rates on banking sector needs to be mitigated
  • China releases positive manufacturing and service sector activity data
  • Oil prices pick up as US tightens sanctions against Iran?

Sentiment continued to be driven by the favourable combination of a benign US interest rate outlook, a positive tone from US/China trade talks and some improving economic developments from the US and China. The US earnings season has also proven supportive, albeit with a notable miss from Alphabet, offset by well received results from Apple.

The S&P 500 capped its best 4 month run since 2009, rising some 3.9%, touching a new all-time high. Major European shares rose by 3.5% and the FTSE 100 by some 1.7%. Sterling was unchanged on the month against the US Dollar.

The US economy has defied concerns with a notable pickup in growth in the first quarter of the year. Whilst the underlying drivers of this led to some questions over its sustainability, the fact that the accompanying inflation data continued to be low heartened markets, serving to reassure that the Federal Reserve was under no pressure to raise interest rates. Donald Trump however was after more, and attacked the politically independent Central Bank, chastising it for not having already cut rates.

Following the late Easter break, UK politics returns to the spotlight in earnest, with both local and the dreaded European elections. It is likely to be a chastening experience for Theresa May and the Conservatives in general. Brexit negotiations between Labour and the Conservative parties are ongoing, however with conflicting political incentives, it seems very hard to envisage an acceptable compromise being reached. With high-profile new parties on the scene and the established duopoly appearing to struggle, is the UK’s political landscape changing?

The UK economy has actually proven more resilient than economists had expected since the referendum, however the ongoing uncertainty is increasingly likely to undermine the economic outlook. Retail sales have been providing an unexpected boost to Q1 UK GDP, prompting the cautious BoE to actually increase growth forecasts. It would appear, for now, that consumers have been less affected by Brexit uncertainties than businesses.

Following signs of a reassuring rebound in their economy, Chinese authorities now find themselves in a tricky position. Whilst their stimulus measures have boosted growth, they are also pursuing a conflicting policy of debt reduction. Given a more buoyant economy their attention may now turn back to the latter. As such, a positive conclusion to the trade talks with the US would be a helpful development.

Markets have typically enjoyed a reassuring start to 2019.  Whilst the underlying sources of support for stock markets remain in place, particularly low bond yields and still supportive Central Banks, we suspect that as the summer approaches markets may seek to pause for breath. Positive news from Trump on China tariffs and Brexit, would be welcomed.

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