What a difference a few months can make..

James Penn
February 21, 2019

We all know that sentiment is a fickle thing in the stock market (as in many other areas of life  – fashions, film stars, consumer goods, and relationships to name but a few…).

But the turnaround in stocks since December perhaps takes the biscuit in terms of recent 180-degree reversals.

As I write, UK stocks are up for the fifth day in a row, touching a four month high. The catalyst for taking the FTSE100 index over 7250 is news that China and the United States could be close to reaching agreement on the ‘trade war’ that dominated the headlines last year.

This is important because there are signs that trade frictions caused by the tariffs introduced last year are starting to have an impact. China has been slowing for months, but signs of sluggishness are emerging in the US too.

The so-called ‘Government Shutdown’ that finished a couple of weeks ago disguised this, owing to a lag in the release of the economic data. Now it has ended, the flow of economic statistics has restarted and is not exactly encouraging.

US Retail sales dropped month on month in December, while consumer confidence has dipped to 2016 levels. US Industrial Production declined 0.6% in January in one of its biggest drops since the financial crisis in 2008.

If the trade disagreements are resolved now (the 90 day ceasefire agreed in December finishes on March 1, after which the tariff rate is supposed to shift from 10% to 25%), then the world economy will look back at this slowdown as a short term blip.

Much depends on developments on this front this week.

At the same time, in the UK it seems that the tedious disagreements of our politicians over Brexit have lost their ability to concern us. UK Retail Sales in January rose over 4% in volume terms over the previous year, their fastest pace in six months.

Real wage growth has increased a little as inflation falls, with the annual rate down to 1.8% year on year in January. But, just as importantly, the British public seems to have grown immunised to all the Brexit talk of ‘crashing out’, mass unemployment, company relocations, and a severe downturn in the housing market.

We are blasé. We have grown used to it. We have reached a saturation point on Brexit. Perhaps it no longer has the ability to stunt our economic activity (other than in terms of construction investment).

The underlying reality is that the likelihood of leaving without a deal looks less likely by the day.

Although the Government lost its (non-binding) vote on the Withdrawal Agreement this week, several things suggest a slow grind towards a deal.

The overheard conversation of Olly Robbins, the UK’s senior Brexit civil servant, picked up in a bar in Brussels, suggests that Theresa May has no appetite for a No Deal departure.

Jeremy Corbyn, the Labour Party leader, has committed to voting for a deal, albeit on the condition that the UK remains in a permanent Customs Union with the EU.

The next vote in Parliament, on February 27th, may see a majority of disparate political forces coalescing around a vote to prevent a No Deal departure, which would kill off the possibility completely.

The market has anticipated these developments. The FTSE100 would not have rallied 600 points since December if the chance of No Deal was still running anywhere near 50%.

But the fact that the Seventh Cavalry is coming to the rescue in terms of terminating the ‘trade war’ surely has something to do with it too.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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