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Market update: Trade policy and the oil price

After a fairly difficult October, November saw financial markets recover somewhat following a change of tone from the Federal Reserve.

An expected interest rate hike in November was accompanied by commentary indicating that Fed Chair Jay Powell will consider taking his foot of the accelerator in 2019. A hike is still expected in December, but a temporary halt to the schedule in 2019 could allow the Fed time to assess the impact its monetary policy is having on the economy.

We need to talk about Brexit

We need to talk about Brexit. As we stand here today it seems unlikely that the deal in its current form is going to pass through government. No one has a crystal ball, but there are three likely scenarios that could occur if Parliament rejects the deal.

  • The deal is eventually passed in a second vote if markets react badly to the rejection
  • Parliament takes control, which could prompt a vote on a second referendum
  • The government loses a vote of no confidence and we have a general election in early 2019

Financial markets seem to be having a tough time pricing in such a binary outcome of the Parliament vote, and then the multiple options in the event of a rejection.

Moneyfarm’s globally diversified portfolios are relatively well positioned to weather whatever volatility we see, and we’re comfortable with that. We’ll continue to monitor the situation and make any changes we think are necessary.

Importantly, it seems that the probability of no-deal is falling. That’s good news for UK financial assets, in our view, as it cuts the downside risk.

Global trade

Global trade policy continues to be a thorny issue. The latest comments coming out of the G20 summit suggested that we did see progress between the US and China.

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The detail however, is likely to be more difficult and we would expect this to be a challenge going into 2019, especially following the appointment of Robert Lighthizer, to head up the negotiations and Canada’s extradition of an executive from one of China’s national technology companies, Huawei.

Extraditing corporate executives is unusual and it’s not far-fetched to assume there will be some form of retaliation. Whilst not directly a trade issue, the move shows the complexity of the tensions between the pair.

If we do see a proper detailed agreement, however, we’d expect financial markets to take that quite well. From the perspective of portfolio positioning, we don’t have a very aggressive view. We are relatively conservatively positioned at the moment and we think that that makes sense.

The oil price

The price of oil has fallen relatively sharply in the last few weeks and the question is what’s driving the decline.

On the supply side we’ve seen some decent increases in supply, notably in the US. There are also signs that OPEC hasn’t been quite as effective as it might once have been in terms of managing the oil price.

On the demand side, the question is really whether this is some sort of an indicator about slower economic growth. For the moment we don’t think that is the case, but it is something to keep an eye on as we go into 2019.

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