WEEKLY MARKET UPDATE: MARKETS SLIDE ON US-CHINA CONSULATE CLOSINGS

MARKET UPDATED

Despite recent strength, equities closed lower last week as tensions between the US and China were ratcheted up, with the forced closure of the Chinese consulate in Houston and the arrest by the US of a Singapore national who has admitted spying for China. In response China has ordered the US consulate in Chengdu closed. Global equities fell -2.1% in Sterling terms, with UK and US markets worst hit, both down -2.2%. EM, European and Japanese equities were also negative, down -1.4%, -1.6% and -1.6% respectively. Meanwhile global yields fell, with 10Y Gilts and 10Y Treasuries closing the week at 0.144% and 0.589% respectively. As such Gilts returned +0.3% for the week. Gold rallied +5.0% in USD terms and is trading at all-time highs, while Oil rallied +1.3% overall last week, although fell at the end of the week on the US-China news.

CIO ANALYSIS

As we enter reporting season, when usually we would be paying close attention to the percentage of companies beating earnings expectations (usually around 75%), although earnings remain important, they are unlikely to represent a guide to most firms’ long term profitability. Indeed many companies have eschewed offering guidance on earnings, with analyst estimates likely to be less accurate than usual, so whether a company beats these expectations is less of a concern than in ‘normal’ times. Of course the levels of earnings will be interesting as a view to how well companies and the economy are faring in these difficult times, so we would be more focused on the prospects for companies facing serious losses. As we have said before, with central banks’ use of QE at record amounts, fundamentals are less important for the performance of equity markets on the whole, at least in the short term. This will continue as long as central banks support markets with QE, there is confidence QE will continue to make a difference, and as long as inflation remains at bay. Why could QE stop making a difference? One answer is an increase in corporate insolvencies, since QE isn’t directly supporting company balance sheets, which is why the health of companies, rather than their earnings, is so important right now.

David Baker, CIO

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