Stock markets around the world enjoyed a strong start to the week as optimism about a trade deal between the US and China picked up. Overnight, all three of the main US benchmarks hit new all-time highs, picking up on gains that had begun on Monday morning in Asia.
Wall Street has risen in six of the past seven weeks and has gained more than 3% this month. As well as trade hopes, a spate of M&A deals has boosted sentiment as investors hope that companies will try to fit takeovers in before next year’s US Presidential election and the possible arrival of a less business-friendly administration.
Hong Kong was a notable beneficiary of the issue by Beijing of new guidelines on intellectual property safeguards in China. The alleged theft of foreign intellectual property has been a running sore in the ongoing trade war with America and signs of progress pushed the Hang Seng index 1.5% higher on Monday.
Hopes have risen that a ‘phase one’ deal can now be signed before the end of the year, although it is unclear whether agreement will be reached before new tariffs on Chinese goods are due to kick in on December 15.
Hong Kong’s stock market has been a laggard during 2019’s global rally. The Hang Seng is just 4% higher year to date, having lost 7% since protests in the territory began in June. That compares with a gain of more than 30% for the Chinese stock market and a rise of 25% for the S&P 500.
The market received a boost this week when e-commerce giant Alibaba saw its shares start trading with a secondary listing in Hong Kong as well as New York. They rose 6% on the first day of dealing in Asia.
Sentiment in the former colony remains fragile, however. Local government elections at the weekend resulted in a landslide for pro-democracy candidates but it is unclear how the Hong Kong government or Beijing itself will respond to the message from voters. Hong Kong’s future as a financial centre remains uncertain.
Other markets in focus this week include Germany, which announced last week that it had narrowly avoided recession in the third quarter with growth of 0.1%. More data this week, including a consumer confidence survey will provide further evidence of Germany’s resilience to the trade-war focused manufacturing slowdown which has held back Europe’s largest economy.
The market impact of improving sentiment towards the German economy is most likely to be felt in bonds and the Euro. The belief that Europe’s power-house was heading towards a recession powered a big rally in bond prices over the summer as Germany’s 10-year bond yield fell to a record low of minus 0.72%. It has since rebounded to minus 0.35% and expectations are rising that the benchmark yield could be above zero next year.
That would imply a big sell-off in Eurozone bonds, which would be exacerbated if expectations of inflation in the region turn out to be too low. This Friday we will get some guidance on that, with the publication of inflation data for the Eurozone.
Also in the spotlight this week is the Indian stock market, which has continued to break new records despite concerns about the country’s economy. The benchmark Sensex index has risen above 40,000 on the back of optimism about a string of government reforms including lower corporate tax and the privatisation of some state-owned companies.
The optimism among Indian investors is, therefore, all about hopes for the future because the current situation is not so encouraging. Corporate profits in the three months to September fell 3% compared with the same period in 2018. Having quadrupled since the financial crisis, shares are increasingly dependent on real economic improvements if they are to maintain their current elevated level.
Back in the UK, shares have also been strong, although the principal driver of the domestic market is probably the election rather than the global trade outlook.
The past week has seen all the main parties publish their manifestos, which many strategists see as the moment of maximum risk during an election campaign. The publication of the Labour and Conservative manifestos acted as a turning point in the 2017 election - good news for Labour and catastrophically bad news for the Tories as an ill-thought through social care policy portrayed the Government as out of touch and heartless.
This time around, the Conservatives have erred on the side of caution. The party’s manifesto runs to around half as many pages as either the Labour or Lib Dem versions and deliberately attempts to avoid disasters, and to please everyone, rather than gain any real policy advantage. Far from offering any giveaways to voters, the manifesto lays out just Â£3bn of new spending and takes tax cuts aimed at companies and richer individuals off the table.
The Labour party manifesto by contrast represents the most radical policy agenda for at least 40 years including an Â£83bn boost to public spending, with the cost very much targeted at big business and the rich. Measures include widespread nationalisations, the unwinding of recent Conservative tax cuts for both companies and individuals, and heavy spending commitments in key election battlefields like the NHS, education and the environment.
The market reaction, which has seen shares and the pound both rise, reflects the belief that Labour has overplayed its ideological hand. Its manifesto is seen as a step too far for middle-ground voters. The polls since the publication of the manifestos have seen the 11-point lead with which the Conservative entered the campaign widen by a few percentage points. Although there remain just over two weeks to go, the election looks to be the Conservatives to lose now although there is considerable uncertainty around the reliability of the polls.
The longer-term outlook for UK investors also remains uncertain, however, thanks to Boris Johnson’s promise that if he is returned as Prime Minister with a parliamentary majority he will push Brexit through by the end of January and then strike a trade deal with the EU by the end of 2020 when transitional membership of the EU is scheduled to end.
In theory, this transitional period could be extended until the end of 2022 but in order to keep the Brexit party onside and persuade them to stand down in Tory held seats, the Prime Minister has vowed not to seek an extension. This means that far from getting Brexit done, a Conservative win would actually usher in a 12-month period in which Brexit is even more the main focus of politics.
On the corporate front, Christmas has arrived early this year. There is hardly any interest on the corporate results front, with just BAT and Compass announcing figures this week. Over the pond, retail will remain in focus ahead of Black Friday, the traditional shopping fest that follows the Thanksgiving holiday on Thursday and extends through until Cyber Monday at the beginning of next week.
An estimated 165 million people are expected to shop over the long weekend according to the National Retail Federation, with sales forecast to rise by around 4% in both November and
December compared with last year. Consumers have been one of the brightest spots in the US economy, where growth has otherwise been held back by a weak manufacturing sector. Consumer spending is responsible for two thirds of US GDP.