Despite the wobble in markets as we entered October, American markets breached all-time highs as the month concluded, the UK saw a surge in the pound and central banks continued to take measures to mitigate the risks of a slowdown to the global economy.
We saw the pound recover in value against other currencies as markets reflected the optimism of a new deal being reached. However, the UK once again walked away from a potential deal with the EU and parliament voted in favour of Boris Johnson’s call for a December snap election to end this political stalemate as he seeks a majority. Close to 100 years ago, when the UK last had a December election in 1923, the Conservatives won the most seats, but the final verdict ended with a hung parliament. UK markets suffered the worst performance among the major indices in October as the FTSE 100 and FTSE All-Share dropped 2.2% and 1.7%, reflecting the recovery in the pound which increases the relative cost of FTSE 100 exporters, thus slowing demand. Our Man GLG UK Income Professional fund gained 0.5% over the month.
US and Chinese authorities have moved in a positive direction after the announcement of what President Trump has called a “Phase One Trade Deal”. The deal that involves a delay in tariffs and additional Chinese purchases of US agricultural products brought equity markets climbing at the end of October. Among all this positive news on trade, we don’t think a permanent deal will be reached anytime soon as both sides will still fight to be the leader in Global technology and there is always the concern that President Trump could decide to escalate the trade rhetoric to bolster some extra support ahead of his 2020 election campaign.
The US federal reserve cut rates by 25bps for the third time this year, but it signalled that they will remain cautious over further cuts to interest rates. Whilst vulnerable to trade tensions, Emerging Markets will benefit from the loose Fed policy that leads to a lower USD. Much of the Emerging market underperformance in 2018 was due to the rising US dollar. We believe the Chinese market is a lucrative opportunity for high growth, although the challenging macro backdrop from the ongoing political distress in Hong Kong seems to be persisting despite the withdraw of the extradition bill that initially triggered the protests.
On November 13th, the US planned to place tariffs on EU vehicles. There has been no progress in these negotiations and the US will need to decide whether they will carry out this threat. Mario Draghi attended his last press conference as president of the ECB, he was replaced by Christine Lagarde, former head of the International Monetary Fund. We still have concerns over European fundamentals, dampened by political risks and currency appreciation. We see this region being much weaker than other regions so we continue to hold our underweight here. That being said, our Polar Capital European hedged fund was one of our best performers as the hedge of the pound to the euro delivered an additional 3% to the monthly performance.
In October, Typhoon Hagibis tore through central and eastern Japan and a sales tax hike weighed on demand. Global trade wars and an increase in the yen have caused declines in exports due to a slump in demand overseas. Yet the markets rose 5% as some are expecting the Bank of Japan to cut rates further into negative territory in the near future.
We have witnessed how markets are highly reactive and susceptible to small shifts in headlines. Brexit continues to orchestrate the UK economy and the trade war will still determine global momentum. I wouldn’t expect this to change over the coming months.
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