Global markets kicked off the year with a strong rally throughout January. It was a welcome relief following a dismal showing the month before. Wall Street’s benchmark S&P 500 Index posted its biggest monthly percentage gain, at 7.9% MoM, since October 2015.
There were two key drivers behind January’s recovery. The extent of the market’s rally underscored their importance in the current global economic climate.
Firstly, the market took the view that the U.S. Federal Reserve (Fed) would slow down the pace of interest rate hikes due to a slowing global economy (led by China) and a more subdued inflation outlook (on the back of moderating oil prices). This view was confirmed late January when the Fed held rates steady at its January meeting and pledged patience in rate decisions going forward. The Fed’s statement removed language indicating “further gradual increases” in rates, cementing the market’s view that the central bank is in pause mode. This gives borrowers breathing room as a resumption of rate hikes would need to be preceded by a clear decline in recessionary risks.
The second driver was positive rhetoric coming out of trade negotiations between U.S. and Chinese government officials. The trade spat has been partly to blame for China’s economy growing at its slowest pace in almost 30 years. Ongoing talks are “seemingly” positive yet it is still premature to pop the champagne. The U.S. has imposed a 1 March deadline for trade negotiations to resolve major issues, failing which there will be an escalation in the trade war. This would most certainly be a huge blow to the global economy, something which both sides wish to avoid.
A critical date that investors are counting down on is March 29, the date Britain is set to exit the EU with or without a separation deal. With the deadline fast approaching, the stakes have never been higher. If Britain crashes out of the EU without a deal it would likely lead to huge disruption globally.
MPs have voted to send Prime Minister Theresa May back to Brussels to renegotiate better terms for Britain’s exit from the bloc. EU officials have insisted that the deal agreed last year is not open for renegotiation. In the meantime, many multinationals with operations based in the UK are either in the process of relocating to mainland Europe or are highly likely to move operations abroad if the UK crashes out of the EU. It now seems unavoidable that there will be long-term negative consequences for the UK.
GLOBAL INDICATORS: Local reporting currencies