Weekly Market Update: Global equities rally, Sterling depreciates as likelihood of a no-deal increases

Market Analysis

This week saw strong equity market returns, with global stocks up +2.0% in Sterling terms. US equities were up +2.6% for the week, with returns enhanced by Sterling depreciation versus the US Dollar and earnings outperformance from both Google and Starbucks. UK, European and Japanese equities were up +0.6%, +1.1%, and +0.5% respectively. Emerging Market stocks gained only +0.2% in Sterling terms, posting a -0.8% loss in local currency terms. UK 10Y Gilt yields were down -4.7bps this week, while US 10Y Treasury yields were up +1.5bps. 10Y German Bund yields fell -5.2 bps, closing the week at -0.376%, with further stimulus from the ECB looking likely as the economic outlook for the Eurozone continues to deteriorate. Gold was down -0.5% in US dollar terms, and Oil climbed +2.0%, with West Texas Crude closing the week at $56.0 per barrel.

CIO Analysis

When dealing with Brexit, or other similar significant geopolitical risks, one has to distinguish between “politics” and “policy”. Politics refers to communication. It is often that one set of communications is required for an internal audience and another for external stakeholders. A PM, for example, might be a zealot against the EU but could employ completely different language when actually meeting his European counterparts to discuss Brexit. Policy on the other hand refers to decisions, or intentions, to act, changing the economic and investment  decisions for a country’s internal and external stakeholders. Investors are always looking for “policies”, treating “politics” as noise. But, in this particular case, the noise can actually transform into a signal, even if the original intention was never that. When do political positions become policy? Good decisions become policy when they fetch votes, or obtain some tangible long term gain for a country. Bad decisions become policy when they cannot be retracted, because some sort of formal expression of popular will, like an election or a referendum, sets them in stone. All politics is local and also increasingly short-termish. So, assuming a democracy, when investors ask themselves: “Will X political declaration [say Hard Brexit] become reality?”, the answer should be “will decision makers profit from this?”. One can predict this, then their decisions should flow from the answer. If not, uncertainty persists and investors should best hedge their bets.

-George Lagarias, Senior Economist

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *