Weekly Market Commentary – 3 January 2020

Killing of Iranian Military Leader could trigger all out Iran-US War
This week has been characteristically quiet; it is traditional at this time of year to pad empty column inches with an annual roundup, and this time there is the added bonus of the end of the decade to provide even more filler material . We have avoided that temptation, if not the irony, and instead choose to scratch around looking for something to talk about. The markets don’t seem to mind the lack of activity however, as the opening days of 2020 have seen a strong start for most stocks.

Elsewhere tensions in the middle east threaten to reach boiling point as the tit-for-tat exchange between the US and Iran shows a real chance of dramatically escalating. The death of a senior Iranian military commander in a US air strike, is expected to provoke a strong response. So far Iran has been targeting oil infrastructure, either in the Strait of Hormuz, or in its drone attack on Saudi Arabia. Oil prices have jumped on the news.

France: Pension reform strike show little sign of abating
France, the country which goes on the most strikes (amongst selected OECD countries), is now undergoing its longest strike in the last half century. The transit strike which has now stretched to 30 days has shut down public transport services, reduced the number of hospital staff, teachers and police officers at work. At the crux of the
matter is pension reform. France currently has 42 different types of pension regimes across the public and private sectors. Pension benefits are mostly worked out using an employee’s 25 highest-paid years of work in the private sector and in the public sector it’s based on payments made in the last six months before retirement.

Macron’s new reform plans include shifting to a single universal points-based system where employees are rewarded for each day worked as well as phasing out early retirement for some sectors. Whether this strike will have a significant impact on the country’s growth rate remains to be seen. A similar strike in 1995, again over pension reform, only knocked 0.2 percentage points off economic growth.

Global: Canada’s Economy Unexpectedly Contracts
Consumer spending continues to drive US economic growth, with the final Saturday of December raking in a whopping $34.4bn – the largest shopping day ever recorded. However, across the border, retail numbers from Canada paint a more woeful picture. Sales contracted 1.2 per cent for the month of October: well below economist expectations of 0.5 per cent. Combine this with weak industrial figures and a housing environment where new house prices have barely risen last year and it was unsurprising to see Canada posted a 0.1 per cent contraction in growth for October.

Recession fears are rising. And while the retail figures only run up to October, manufacturing data for the month of December shows a stalling sector as new orders fall, and the existing backlog rapidly dwindles. None of this has troubled its currency however. the Canadian dollar was the best performing currency against the US dollar last year. A combination of resisting rate cuts as well as an oil price rally in the last few months of 2019 helped drive strong returns.

China: Central Bank Frees up Funds ahead of Chinese New Year
The People’s Bank of China (PBOC) cut the amount of cash that all banks must hold as reserves, releasing around 800 billion yuan (£88 billion). While markets have welcomed an anticipated US-China Phase one trade deal, analysts expect a deal will relieve only some of the pressure weighing on the Chinese economy, which has been impacted by a slowdown in both domestic and global demand. This in turn has slowed down business investment and reduced confidence. Thus, freeing up funds should help inject stimulus into the economy.

Freeing up more cash also reduces the risks of a credit crunch. The Chinese New Year holidays are set to fall later this month, earlier than usual, and it’s expected that demand for cash will surge as people withdraw for travel and shopping. The PBOC remain confident that overall liquidity in the banking system will remain stable ahead of the Chinese New Year.