Market Update

This week, positive developments in the US-China trade negotiations and an agreement to avert another US government shutdown led to robust returns in global equity markets.
As anticipated in our previous analysis, President Donald Trump announced on Tuesday, February 12, 2019, that he is willing to extend the March 1, 2019, deadline for higher tariffs due to progress in the trade talks. Additionally, while he only secured $1.375 billion of the desired $5.7 billion for his border wall demands, he showed a willingness to sign the deal reached by congressional negotiators to avoid a government shutdown. This suggests his preference for an imperfect deal over no deal. However, on Friday, February 15, 2019, he declared a national emergency, allowing him to redirect funds from other government sectors to build the proposed border wall.
On the economic front, a global disinflationary trend has emerged, primarily driven by lower energy prices. In the US, headline CPI inflation dropped from 1.9% to 1.6%, the smallest annual gain since June 2017. This aligns with the recent dovish comments from the Federal Reserve, emphasizing patience with future interest rate increases. We have long maintained the view that this tightening cycle will be one of the most lenient in history, marked by a shallow path of interest rate increases with the peak significantly below historical averages. Similarly, the UK experienced a decline in CPI to 1.8% from 2.1% in December, while China's CPI fell to 1.7% from 1.9%.
UK GDP data indicated a growth of 0.2% in the fourth quarter (down from 0.6% in Q3) and 1.3% for the entire year. The slowdown was primarily attributed to reduced business investments. Despite the Brexit uncertainty, the 0.2% growth in Q4 raises questions about the potential economic trajectory if the UK had chosen to remain in the EU in the 2016 referendum.
Regarding Brexit, speculations about an extension of Article 50 surfaced after an incident involving Olly Robbins, Theresa May's chief negotiator, discussing strategy in a Brussels bar. While an Article 50 extension seems almost inevitable, we emphasize its limited benefit without meaningful progress on future EU trading agreements. Simply prolonging the departure date without clarity on future relationships may continue to undermine business confidence and investment.
Looking ahead, the focus of the upcoming week will be on the release of the Federal Reserve minutes on Wednesday, February 20, 2019. Analysts are keen to understand the reasons behind the central bank's shift towards a more dovish stance on interest rate policy.