Weekly Market Commentary – 20th December 2019

Have we seen an end to the “Boris Bounce”?

This week, the certainty that the market has been so excited about following the Conservative victory was quickly vanquished, replaced with our old friends’ ambiguity and doubt. The announcement by Johnson that he would amend his Brexit bill, to expressly rule out extending the transition period after we leave the EU, put an end to the so-called “Boris Bounce” with both stock markets and the pound falling back to where they were before the election. As we get into the free trade negotiations next year, expect a few more bounces and bounce-backs as talks progress.

Elsewhere Donald Trump made history, becoming just the fourth US president to be impeached. There will now be a trial held in the Republican controlled Senate that is expected to acquit the president and leave him in office. Given the exercise is doomed to fail, there are more than a few on both sides wondering why bother. In the end the facts of the case were so stark as to leave little choice but to proceed. With the outcome seemingly pre-determined, markets have paid little attention.

UK: FCA probe Bank of England Early Audio Leak
Reports emerged this week that an unnamed supplier had allowed some traders to get ahead of the market by listening to Bank of England (BoE) Governor Mark Carney’s comments seconds before it was publicly available. This allowed enough time for high speed traders to gain an unfair edge. The audio feed of the press conferences was installed to act as a back-up in case the main video feed failed.

The FCA are investigating the issue further. But they will have to do so without their leader Andrew Bailey. Bailey will be the next governor for the BoE despite his time with the watchdog peppered by several high-profile controversies.

Meanwhile the BoE continued its wait and see approach leaving rates unchanged. While a post-election economic bounce is expected given the greater clarity around Brexit, the Central Bank will continue to monitor how the UK’s relationship with the EU develops and whether global growth stabilises next year before making a change to rates.

Global: Will weak retail figures hurt the UK and US?
This week, both US and UK retail sales underwhelmed economists’ expectations. In the US, retail sales for the month of November rose at a sluggish pace as sales increased by 0.2 per cent for the month of November. Over in the UK the figures were even more dire. The volume of retail sales fell sharply by 0.6 per cent.

Consumer spending has been the key driver of growth for both economies and the weak numbers indicates it’s likely that economic growth will cool this quarter. However, both figures don’t account for Black Friday sales which fell out of the four-week reference period.

There is still hope that GDP will continue to grow this quarter for both nations. Residential investment activity, manufacturing and industrial production rebounds may be enough to maintain US GDP growth even if final retail sales figures falter. With Brexit still hanging over the UK, it remains to be seen if progress on the issue, possible now following the election, will translate into economic growth for Q4.

Sweden: Central Bank Closes Chapter on Negative Interest Rates
This week, Sweden’s Central Bank (“Riksbank”) raised interest rates by a quarter percentage point from -0.25 per cent to zero. By hiking rates, Riksbank became the first central bank to raise rates from sub-zero to neutral this year. Denmark, Eurozone, Japan, Switzerland and Hungary’s interest rates still remain in negative territory.

Sub-zero rates tend to be beneficial for borrowers and detrimental to savers. Since Riksbank became the first Central Bank to implement negative interest rates a decade ago, house prices have soared, business and household debt has increased while “Zombie” firms which rely on cheap loans to survive have drained productivity. With Sweden hiking rates will other countries follow suit? Not Japan in the near term.

Despite some positivity around trade, The Bank of Japan cited negative risks to Japan’s economy, leaving interest rates steady this week.