The upcoming 2020 U.S. presidential election makes de-escalation of the China-U.S. trade war more likely to happen. Moving into the fourth quarter, markets appear trapped in an episode of Deal or No Deal, with uncertainties surrounding the China-U.S. trade talks—and to a lesser extent, Brexit—dominating the picture.
Europe’s outlook will tend to improve if global trade tensions ease and China embarks on economic stimulus. Eurozone equities are close to fair value on the calculations, while core government bonds are long-term expensive.
As a result of the risks around trade and regional growth, central banks in the Asia-Pacific region are responding by cutting rates, which should provide some support moving forward. While easier monetary policy from the Reserve Bank of Australia has provided a boost to the Australian equity market. Valuations in Emerging Asia and Japanese equities, meanwhile, continue to look reasonable to slightly attractive.
On balance, a combination of trade-war resolution and policy stimulus will see the global economy recover in 2020. The asymmetry of the different outcomes—bear market versus limited upside—requires caution until there is more clarity. To read more:
United States – Economic Summary
The current economic expansion has become the longest on record but economic growth is now slowing, partly due to increased tariffs on imported goods and high trade tensions. The labour market has created many new jobs and unemployment has fallen to historically very low rates. Rising real wages and high asset prices are supporting average household income and consumption growth. On the other hand, in addition to intense trade tensions and uncertainty, the combined effects of a waning fiscal impulse, weaker growth in trading partners, and demographic pressures are weighing on confidence and activity. The Federal Reserve has acted to meet its dual employment and inflation mandate. With inflation returning to target only slowly and inflation expectations slipping, no changes to interest rates are projected, which may help meet the inflation target symmetrically. With large budget deficits and unsustainable long-run fiscal trends, the federal government has limited space to support the economy. Reducing barriers to finding jobs would help boost labour supply and productivity.
Australia – Economic Summary
Economic growth is projected to firm to about 2¼ per cent in 2020-21. While weaker trading partner growth and a downturn in domestic dwelling investment will weigh on economic conditions, recent household tax cuts and monetary policy easing should provide some support to activity. Subdued output growth and lingering uncertainty will weaken the recent strong labour market conditions. Monetary policy is accommodative and the central bank is projected to make a further cut in the policy rate in its attempt to achieve the inflation target. Macroprudential policies may need to be tightened if lower interest rates fuel house prices, which would create imbalances and expose the economy to downside vulnerabilities. Fiscal policy, which on current plans is expected to exert a broadly neutral influence, may need to play a more active role in strengthening economic growth.
2019 has been a good year for markets in Australia and abroad with low interest rates and moderate growth supporting investment in equities. Below is a summary of the year so far across key local and international markets.
Dow Jones Industrial Average (USA):
ASX All Ordinaries Index (Australia):
FTSE 100 Index (UK):
Shanghai Composite Index (China):
Two significant events currently dominate the US political arena – the impeachment of the President and the continuation of the primary campaign for the selection of the Democratic nominee for the 2020 election on the first week of November.
Depending on who you believe or what you read the impeachment of Trump is an imperative to save their democracy or uphold their constitution: Impeach Trump. Save America – New York Times
Or in various forums an attempted coup:
“As I learn more and more each day, I am coming to the conclusion that what is taking place is not an impeachment, it is a COUP, intended to take away the Power of the … People, their VOTE, their Freedoms, their Second Amendment, Religion, Military, Border Wall, and their God-given rights as a Citizen of The United States of America!”
Source: Twitter.com @realDonaldTrump 2 Oct 2019
Which he reiterated yesterday in a letter to the Speaker of the House of Representatives, Nancy Pelosi: Letter from President Trump
There is still a wide field of potential candidates to run against the President, with Joe Biden leading the race: Which Democrats Are Leading the 2020 Presidential Race?
As we can see above neither event has deterred markets this year, but it remains to be seen whether that is the case in 2020.
Finally to UK Politics, hopefully we will soon hear the last of Brexit as Boris Johnson took out the recent election with a large majority, in fact one not seen since the 1980’s. He has promised to now bring an end to Brexit early next year, but will likely face renewed challenges for Scottish independence following a strong showing from the Scottish National Party, who has immediately called for another referendum.