Global stocks slide, Sterling falls on May's resignation plans

Market Update

Last week reports about trade wars oscillated between good news and bad, with tech stocks rallying on news of the US easing curbs on China’s Huawei Technologies, only to reverse as it emerged that the US is considering sanctions on other China tech firms. These events overshadowed the release of FOMC minutes which revealed the Fed is not eager to take action to raise or cut interest rates, as while there is optimism about the US economy, there are concerns about the global economy and low inflation. The result was US equities led global equities lower, down -1.0% in Sterling terms. UK equities fell -0.9%, while European and Emerging Market equities were down -0.7%. Sterling had another poor week as Theresa May’s resignation and expectations of strong support for the Brexit party in the European elections raised the prospects for a no-deal Brexit. UK 10Y Gilt yields fell below 1%, down to 0.956%, although this was part of a broader global fall in yields, with US 10Y yields falling -7.1bps to 2.32%. In US Dollar terms Gold rallied +0.6% and Oil fell -6.9%.

CIO Analysis

The pan-European election results were a mixed bag. Overall, the populist footprint in the European parliament has increased, exacerbating centrifugal forces, further impeding European integration and possibly adding to strains on the Euro. In Britain, voters sent the Brexit party to parliament with enough MEPs to become the biggest national party bloc in the European parliament.

This could make future negotiations even more difficult, raising the probability of a Hard Brexit. However, on the other side of the continent, we saw Greece emphatically rejecting populism. The first country, under pressure from economic malaise and European mismanagement, to look to populists for a solution, bucked the trend and gave political centrism another chance. The local stock index soared and yields collapsed as investors cheered the result.

This serves as a reminder to investors that there’s a risk premium attached to populism. Also, for a western generation that has not experienced serious political abnormalities, it suggests that political realignments are cyclical in nature, with populist parties unlikely to hold the upper hand over centrist parties in the long term.

David Baker, CIO

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