This week's update comes from our investment team in the UK.
Equity markets have been as calm as a mill pond of late despite a barrage of negative global political developments. Instead investors have taken their cue from a growing conviction that the US Federal Reserve, which began 2019 poised to raise interest rates will now move to cut them over the summer. The market’s “pining” for a rate cut comes from an assumption that central banks will ride to the rescue come what may to keep the economic cycle from rolling over any time soon.
Central to expectations that the US will move to lower interest rates is the Federal Reserve’s policy statement which is due to be issued later on this week. Federal Reserve chairman Jerome Powell is widely expected to drop the word “patient” from its statement and at the same time downgrade the economic growth forecast for the world’s largest economy.
Slowing economic indicators such as employment growth and weaker activity in the US housing market are likely to have swayed members of the policy committee. The risk though for investors is that the Federal Reserve will not signal the timing that they are assuming.
Hopes for a US interest rate cut have overpowered trade concerns and although one potentially damaging trade war has been averted between the US and Mexico lingering concerns continue to “bubble” over US Chinese trade relations. President Trump has once again issued threats to raise tariffs on China if Chinese President Xi Jinping does not agree to meet at the upcoming G20 summit in Japan later this month. China appears to have hardened its resistance rather than show signs of the potential capitulation and “patience” that Trump is hoping for. A further political complication also emerged last week after Washington accused Iran of being behind two attacks on oil tankers in the Gulf of Oman.
Turning to domestic political matters, can anyone stop Boris Johnson and his stage-managed campaign to be the next Conservative Party leader and Prime Minister? A feeling of inevitability appears to be setting in with his rivals “jockeying” for potential cabinet positions rather than focusing on how they might challenge Boris.
“Patience” is sorely missing.
The emergence of Rory Stewart in the leadership contest has perhaps been the highlight and although his unconventional campaigning is unlikely to provide him with enough momentum this time round, he could yet prove to be a potential thorn in the side of a Boris-led government. The Conservative leadership contest has had little impact on UK markets, with the stock market in particular more exposed to global factors and currency movements. Nevertheless businesses and investors are still none the wiser about the type of world they will be facing after 31st October.
Have a good week.
Photo source: https://www.cartoonmovement.com/collection/116