A high-stakes global game about geopolitics...
Financial markets drew a sigh of relief that Iran's retaliation after the United States assassinated Major General Qassim Sulemani was limited and that it was by mistake that the Iranian military shot down a civilian Ukrainian airliner. The announcement of new US sanctions against Iran had little impact on stock markets, but Iran has signalled that its long-term goal is to drive the US out of the Middle East.
During the past week global equities − as measured by the MSCI All Country World Index − gained about 1.3% in US dollars. American stock market indices reached new record highs, with the Dow Jones breaking through the psychologically important 29,000 threshold. The broader S&P 500 also touched new highs. Meanwhile oil prices fell to their levels of a month ago, before the US-Iran attacks (around USD 64/barrel for Brent crude).
The tug-of-war between geopolitical and economic forces is likely to continue, however. This week's focus of attention is the signing of the Phase 1 trade agreement between the US and China today (Wednesday, January 15). According to US President Donald Trump, negotiations for Phase 2 will begin immediately afterward, but he indicated that the talks may not be completed before the US presidential election in November. A lot can still happen on the trade front; for example, the White House has a history of diverging from existing agreements (Mexico), and China's other trading partners may be losers if Chinese imports from the US must increase by USD 200 billion over a two-year period. Trade talks between the US and the European Union, as well as between the EU and the United Kingdom, may also not be entirely painless.
China no longer seen as currency manipulator – other countries scrutinised
Another positive development is that the US Treasury Department's twice-yearly report no longer regards China as a currency manipulator. This changed view is also part of the Phase 1 agreement, in which China – according to the US – has pledged not to devalue its currency and to be more transparent about the currency-related actions of the People's Bank of China and the country's state-owned banks. Other countries are being scrutinised instead, with the US expanding the number of countries it regards as potential currency manipulators to 20: Switzerland is among the new names on the list. Being classified as a currency manipulator does not trigger any immediate sanctions but still increases a country's chances of being drawn into trade wars, especially in light of the Trump administration's increased focus on currencies.
Report season – and likely downward earnings revisions – under way
Corporate reports for the fourth quarter of 2019 have begun, with reports yesterday from some of the largest US banks – including Citigroup, JPMorgan Chase and Wells Fargo.
We believe that global market corporate earnings forecasts for 2020 as a whole, which currently predict gains of 9-10%, will be revised downward.
Room for economic stimulus in China
Chinese inflation remained at 4.5% in December, which was lower than expected. This had a positive impact on financial markets, since it will give China room to stimulate its economy further. This is one reason why the World Bank expects a slight increase in global growth this year. SEB's forecast is that global growth in gross domestic product (GDP) will be around 3 per cent during 2020.
Macroeconomic data – weak in Europe, but healthy US figures
Economic data during the past week indicate a weak manufacturing sector in Europe. The US labour market continued to show upside surprises last autumn, and although American job growth decelerated somewhat in December, it was considered about right. Meanwhile increases in hourly earnings were modest and US unemployment remains at around its lowest level in 50 years.
Our market view
If growth holds, stock markets will hold
The power of the stock market rally late in 2019 created a positive momentum that may very well persist for another while. Continued extremely low interest rates and bond yields led to the acronym TINA (There Is No Alternative), which is considered to be one driver behind the rally. A closely related acronym is FOMO (Fear of Missing Out) – few investors want to be left standing on the station platform with low-yielding bonds in their portfolios as the stock market train roars past.
But there is no shortage of threats to this positive scenario. Today’s stock market valuations are high in a historical perspective. Meanwhile the subdued economic growth outlook suggests that corporate earnings will show only modest increases and that they risk coming in below the (perhaps overblown) expectations of market analysts.
Since most investors already assume that corporate earnings may end up below analysts’ forecasts, and considering the lack of alternatives to equities, the strong start to this stock market year may also last for another while. Economic developments will then determine the stock market mood during 2020, probably seasoned with political surprises that can move the markets, especially in the short term. We anticipate plenty of fluctuations and drama, and we expect returns to be well below those of 2019, though slightly positive.
This week’s agenda
- January 15 – The Phase 1 trade agreement between the US and China is scheduled to be signed.
- January 15 – Swedish inflation measured as CPIF (the consumer price index excluding interest rate changes) is expected to remain stable at around 1.7%.
- January 16 – We expect a slight increase in American retail sales for December, by 0.3% from the preceding month.
- January 17 – We are forecasting somewhat weaker US industrial production in December, while the market believes it may be unchanged.
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