Review of markets over November 2018Contributors Maria Paola Toschi, Global Markets Insights Strategy Team
As in recent months, geopolitical events dominated market moves over the course of November. The outcome of the US midterm elections was broadly as markets expected. The Democrats took control of the House of Representatives and the Republicans increased their majority in the Senate. As a result it seems less likely that the Republicans will be able to extend fiscal stimulus in a bid to tempt voters in the run up to the 2020 Presidential elections. US growth looks set to slow through the course of 2019.
The US administration’s more hostile approach to global trade played a significant role in the risk off sentiment that prevailed through much of November. Markets are increasingly concerned about the impact on growth outside of the US, but also the ramifications for growth in the US as tariffs raise cost pressure for households and firms. The meeting between President Xi and President Trump at the G20 at the end of the month showed some inclination to de-escalate the tensions, but significant areas remain where it will be difficult to find common ground.
There were plenty of other political events for investors to digest in November. Some progress was achieved on Brexit as a withdrawal agreement was agreed between the UK and the European Union (EU). The deal was underwritten by the leaders of the 27 EU member countries, and will be submitted to the UK parliament in December. The deal presented is the only clear solution to the Irish border question, but the need to align to EU rules is not palatable to all within the Conservative Party. There remains considerable scepticism amongst investors about the ability of the Prime Minister Theresa May to pass the deal through the House of Commons.
Our base case scenario is that final approval is still likely. Aside from a “no deal” scenario, which has little parliamentary support, the possible alternative outcomes of a new referendum or general election both carry the risk of no Brexit at all. We think that a majority of UK MPs will ultimately find all of these alternatives less palatable than the proposed deal. But there is likely to remain considerable volatility—particularly in sterling—over the coming weeks and sterling fell 0.7% over the month.
Tensions between Brussels and Italy also persist. The European Commission rejected the Italian budget law after no significant changes were made to the first spending proposal under the new government. It is unclear whether the Italian government will alter its proposal or face an “excessive deficit procedure”. More recently, discussions seem to have become more constructive between the Italian government and the EU, which could suggest the possibility of a compromise. The spread between Italian and German 10-year government bond yields fell back below 300 basis points (bps), having peaked earlier in the month at 327bps.
With geopolitical concerns continuing to weigh on risk appetite, global stock markets were unable to bounce back after the sizeable declines registered in October.
Exhibit 1: Asset class and style returns in local currency
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