Constructive tones amongst much noise

7 April 2017

Compared to the decent Q1 asset class returns, as shown above, the month of April started on a more muted note. However, after 12 months of strongly up-trending capital markets a certain amount of consolidation and sideways trading is to be welcomed, to prevent overheating.

Since I already commented on the March and Q1 returns last week, let me turn to the notable events and news since. The media's focus was rightly on the Stockholm terror attack and the heinous sarin gas bombardment by the Syrian Assad regime on its own people. The abhorrent Stockholm incident echoes those in London, Berlin and Nice. They are all sadly aligned to the concern we expressed last year, namely that defeating IS extremists in Syria and Iraq will return those of European immigrant origin - now brutalised - to spread their terror here. An unpleasant challenge for our western societies and politicians certainly, but likely of very limited impact on the economy and capital markets - as we have learned.

Trump's retaliatory attack on Syria on the other hand carries a different message. For one, that the international community's failure to retaliate after the gas attacks 2 years ago has finally been reversed. All other rogue states in possession of weapons of mass destruction must know that their actual application will always have severest consequences for those responsible. Secondly, the US are not retreating from their traditional role as the ultimate global police force regardless of what the president may have suggested about a US withdrawal from the global theatre. This is important because it provides us with yet another indication that the Trump administration is perhaps not as radical and non-conform as the president's tweets suggest.

The removal of Steve Bannon, the former senior executive of the nationalist website Breitbart News, as a permanent member of the US' National Security Council is another such sign of '˜de-escalation'.

The summit with China's leader Xi Jinping at Trump's Florida golf resort had concerned political observers for a while as there were fears that the politicians of the 2 most powerful nations might clash, which could start a trade conflict. At the time of writing such concerns seemed unfounded, as the two appeared to get on well. Common security and economic interests may well play a strong role in this. More about the summit's wider implications and the current state of the US economy in the next article.

Turning from the Global to the domestic UK perspective, there seemed to be a widespread and collective sigh of relief when Theresa May suggested that her government would accept that an orderly Brexit may require transitional arrangements that would take the exit process well beyond 2 years. During such a transition period, the UK would no longer be EU member in name, but remain de-facto member by trading continued membership obligations for continuation of the existing preferential treatment until a final deal is achieved (or not). The acceptance of this approach by even the staunchest Brexiters will have sent a conciliatory signal to the EU-27 nations, that perhaps there is room for compromises amongst all those '˜red lines'.

This slight change of tone obviously doesn't automatically lead to a mutually beneficial divorce arrangement, but it wins more time to avert a '˜Crash-Brexit' simply because the negotiators run out of time. The muted reaction by currency markets tells us that there had been an assumption all along that negotiating lines would inevitably soften. In the meantime economic data releases for the UK were mixed, with the services sector displaying strength while industrial production suffered a sudden month on month decline.

Other less noticed de-escalations came from the Greece-EU-IMF negotiations, where some surprise breakthroughs in principle where agreed.

Another renewed threat in the form of falling oil prices has also morphed back to a non-issue, with the price per barrel of oil having gradually recovered back to the previous low to mid $50/bbl level.

With markets in calmer waters, a number of previous concerns receding and the Global economy still making steady progress, it is possible that some of the potential market volatility that we foresaw will not come to the fore. However, there are undeniably also still obstacles and threats that have not been removed, like the slowing of growth rates in China and the US or political instability in South Africa and the threat of Turkey formally turning into an autocracy. The poor US employment numbers for March may have been caused by temporary effects like the snow storms in the East, but they serve as a reminder that markets are right to pause in their further upward movement until more evidence emerges about the true state of the economy.

The coming weeks will provide good opportunity for such evidence through the quarterly company earnings announcements season, which starts next week. I am hopeful that we will see more signs of steady progress, but at the currently still quite elevated stock market valuation levels there is equally opportunity for disappointment and subsequent market correction. Markets have prices in considerable growth expectations and disappointment could be badly received - watch this space!

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