News

And it was all going so smoothly, we had planned to write that it was a quiet week. Christmas a fading memory and the New Year with had some positive news on US-China trade relations, helping markets edge higher on Thursday night. Then came the biggest geopolitical act in months: a US drone airstrike killed Qasem Soleimani, the head of Iran’s elite Quds force, on the streets of Baghdad. It is hard to overstate how important a figure Soleimani was in Iran. He was accepted as Islamic Republic’s second most powerful leader, ahead of President Rouhani and behind only the Ayatollah. This is a massive step up in tensions between Iran and the US, and a significant increase in near-term global risks. 

This event brings into contrast our recently discussion that both markets and the underlying economy are finely balanced. A return of confidence led to an ongoing rally in asset prices and the reduction in US / China political risks had created a large flow of cash into riskier investments. 

Now, markets have been â€œre-sensitized” to political shocks and all geopolitical news is able to create reaction. President Trump’s announced the drone strike by simply tweeting an image of the American flag, and escalating tensions further. Global oil prices spiked more than 4% up in the wake of the news, equities fell, and fixed-income bonds saw reversals of the sharp losses experienced during the quiet period â€“ evidence of the impact such events have on markets. 

However, Iran is not the only geopolitical spook story. Over the holiday period, North Korea became a focus because of Kim Jong Un’s â€œdeadline” for the US to change its sanctions policy, and the implied threats of a return to over nuclear weapon development. Despite the death of Soleimani, for now, we can take comfort in the fact that things have not in deteriorated in North Korea.  

Global market action in the first few days of 2020 was dominated by China, which went without the Christmas break. Markets were buoyed by news that phase one of a trade deal between the US and China is likely to be signed on the 15th of this month. The trade war between the world’s two largest economies usually tops the list of concerns for global investors, so a thawing of relations here is undoubtedly a plus. 

As we would expect the Trump administration likes to claim victory, and so economic advisor Peter Navarro riled Chinese negotiators by implying that the US had cowed them into submission at a weak moment and this before details of the agreement have not yet been released. However, a crucial development has been a rise in the value of RMB against the dollar, with $1 now buying less than 7 RMB. This is significant, because it suggests that currency value was part of the arrangement.

The Trump administration officially labelled China a “currency manipulator” back in 2016 for pushing down the value of its currency to boost demand for its exports. How accurate that charge has actually been over the last four years is debatable, but it has certainly proven a sticking point during negotiations. Previously, Chinese officials seemed to regard a currency pact as not up for discussion – worried that it would lead to the situation of the bursting asset bubble and decades of economic stagnation that Japan experienced following the Plaza Accord in 1985. 

Chinese officials will still be wary of that, but may now consider it a necessary ill. In order to offset the negative impact on China’s exports, the People’s Bank of China has opted to ease monetary policy â€“ lowering reserve requirement ratios and fixing mortgage rates to a new more flexible benchmark. Actual economic data in China is still less than ideal – as it was for all of last year, but officials can take some heart in the latest forward-looking data, with manufacturers’ new orders rising somewhat. 

This was enough to send Chinese equities higher for the week. A resolution to the trade war and a reacceleration in Chinese growth will be crucial for markets and the global economy. So as ever, these are some of the most important stories to watch as we head into a delicate economic situation this year. 

Back at home, news over the last few weeks has been more ‘silent night’ than ‘rocking around the Christmas tree’. The decisive election result has led to a general feeling that the Brexit drama will finally see a definitive end. House prices have risen slightly, and there is some optimism among estate agents that the spring could be quite good.