What a way to end the year.
Over the past 2 days, we’ve seen two of the largest clouds of uncertainty in the global economy begin evaporating away, having been hovering over financial markets throughout 2019.
🇺🇸 / 🇨🇳 Trade War
ICYMI - the US and China have agreed to a “Phase One” trade deal, covering issues including intellectual property (IP), technology transfers and agricultural purchases as well as halting $160bn of planned US tariffs and reducing some existing tariffs, too.
China will step up its imports of energy, agricultural products and professional services from the US while also committing to reform its IP protection regime, taking steps to address accusations of currency manipulation and tackling issues around forced technology transfer which Chinese companies have long been accused of.
While this is just a first step, it is notable in that it is a legally enforceable agreement, and how the two countries step up co-operation from here will determine the outcome of any future / “phase two” agreements.
Experts argue this agreement covers low-hanging fruit, and that future negotiations on China’s industrial policy and technological development are likely to be tougher, but financial markets decided that’s a problem for 2020 and beyond:
The S&P500 and NASDAQ both surpassed and then traded around all-time record highs at the end of this week following news of the trade deal.
Stocks with exposure to China were among the largest beneficiaries. Tech companies Qualcomm, Nvidia and Micron who have 55% - 70% of their revenues coming from China gained over the week, while Tysons Foods and other agricultural exporters also saw share price gains.
Similarly, some commodity markets hurt by the tariffs saw a positive end to the week, with soybeans closing higher yesterday.
🇬🇧 General Election
Again, ICYMI - Boris Johnson’s Conservatives won an overwhelming majority in the UK House of Commons, giving them a clean 5-year mandate to go out there and deliver Brexit via the Withdrawal Bill, on January 31st 2020. Whether you are pro- or anti-Brexit, it no longer matters - Brexit will happen with Parliament no longer able frustrate the government’s ability to deliver it. The country will undoubtedly remain divided over the issue for years to come, but financial markets were clearly happy to have more certainty on how the future will likely unfold as well as seeing the back of Jeremy Corbyn, who will now step down as the Labour Party leader.
While the Brexit vs. No-Brexit cloud has now evaporated away, there will likely be a new one to replace it in 2020 - covering issues such as what kind of trade deal the UK gets with the EU, and how that impacts the UK’s ability to negotiate trade deals with other the US & countries across the world. Negotiating a trade deal with the EU will take up all of 2020 (and likely last into 2021), after which the UK can also nail down trade deals with other countries.
But again, that’s a problem for 2020 - financial markets didn’t seem too concerned for the time being:
GBP rallied ahead of the election and remained strong going into the weekend at around 1.33 GBP/USD (highest since July 2018) or 1.20 GBP/EUR (highest since April 2017).
The FTSE 100 rallied 1.1% while the FTSE 250 gained 3.4% on Friday to hit an all-time high following the election result.
Stocks in industries which would have been up for nationalisation under a Corbyn Labour government have seen a sharp bounce, with “Corbyn risk” now out the way. As an example, UK banks including RBS, Lloyds, Barclays, OneSavings & Virgin Money all enjoyed share price increases of 5-20% yesterday.
British business leaders welcomed the political stability, signalling improved business confidence ahead with the potential for increased investment and dealmaking in the UK - watch this space.
So what about 2020?
While it does look promising for the global economy & trade overall, we think 2020 will probably come with its own set of challenges, too. In the next section, we look at some of the likely talking points to help you start preparing...
What to Watch in 2020 🔎👀
We’ve picked out some “known unknowns” which are likely to be 2020’s focus points across the US, UK & EU.
Each of these topics is likely to have its own specific impact on stocks and broader financial markets as they happen - we’re looking forward to keeping you in the know as it all happens!
US 🇺🇸
Where do we even begin? Expect the US to provide even more headline (& Twitter) drama than usual in 2020.
Politics:
Impeachment - the House has voted to impeach Donald Trump, but it’s all but certain he will be acquitted by the Republican majority Senate. Expect political fireworks if he does in fact end up being removed from office.
Election - by this time next year, the world will know whether it is staring down the barrel at another 4 years of Donald Trump. All eyes are on the Democrats and their ability to select the right candidate to successfully challenge the POTUS at next year’s polls in November, but the field remains crowded.
Monetary Policy: The FOMC kept interest rates unchanged this week, and signalled no further interest rate changes are currently expected in 2020. The FOMC and other Central Banks across the world have arguably been behind this year’s stock market rally with numerous interest rate cuts in 2019. This is unlikely to continue into 2020, throwing up potential headwinds for the global economy.
US / China Trade: with “Phase One” done, investors will have their eyes peeled for news on further progress on trade between the US and China. Most of the progress here will likely take place in the first half of the year, before the US election cycle kicks in, and any real progress will be driven by how well both the US and China implement and adhere to the Phase One deal.
USMCA: 2020 will also see an implementation of the revised North American trade agreement - expect US autos to benefit, and keep an eye on the Mexican & Canadian equity markets for some positive momentum, too.
North Korea: with Kim desperate for the US to ease sanctions, don’t be surprised if we see more of the Trump / Kim love-hate relationship next year.
UK 🇬🇧
Trade negotiations will likely dominate here with the potential for some (likely slow) progress on domestic issues.
EU trade negotiations: can they be done by end 2020? If not, will the negotiation period be extended, or do we run into no-deal territory again?
Other trade negotiations: with Donald Trump already signalling eagerness to do a deal with the UK, how much is realistically achievable before terms of the EU-divorce are set in stone?
UK stocks: unloved by investors since 2016 - will they continue the strong performance they saw in 2019 next year? This may go hand-in-hand with any improvements we see in business confidence and investment as well as movements in the GBP FX rate.
EU 🇪🇺
UK trade negotiations: Angela Merkel and Emmanuel Macron have already warned that the EU will be tough on Brexit trade negotiations next year - stay tuned for details on which industries might perform relatively better as we get more news of progress in trade negotiations next year.
Fiscal Spending: with the ECB fast running out of monetary policy tools to help spur economic growth in the region, Christine Lagarde - its new President, has been vocal about the need for European governments to start loosening their purse-strings to help spur growth in the region. Expect more on this topic in 2020.
Climate Emergency: Sadly, of all 3 regions discussed above, the EU seems to be the only one with the necessary political will to make further progress on reducing carbon emissions. Talk of carbon credits and other incentive schemes could finally progress into something concrete, which would have knock on implications for Europe’s renewable and non-renewable energy companies.
Some countries are unilaterally taking the lead (Norway now pays Congo to preserve its Rainforest, for example), but expect TIME magazine’s Person of The Year Greta Thundberg to continue inspiring people around the world in 2020. Maybe - just maybe - we’ll see more ambition and leadership from the EU here. One can only hope. 🙏
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