UK
The Prime Minister suspects we are all fed up, which looks like a rare display of emotional intelligence from an MP. The last week has seen the possibility of a no deal Brexit significantly increase in probability with the EU only willing to grant a meaningful extension if Mrs May’s withdrawal agreement is passed. This still looks unlikely, which means that we are nearing the original deadline with nothing in place, so the default position of no deal, WTO terms, etc. is a possibility now. That said, parliament is not going to stand idly by and watch us go over the cliff edge and will instead attempt to take back control through another round of votes. This might give clarity on whether a softer Brexit (permanent customs union/single market alignment) or even a second referendum are possibilities, but we could well see a no confidence vote take place, and this time some Conservatives may be willing to confront the risks which a General Election would entail. The only certainty at this stage is extreme uncertainty, and although some are reassured that parliament will simply not allow us to crash out, some hard line Brexiteers can sense that the no deal they thought impossible until recently remains a reality. Indeed, some who supported May’s deal a few weeks ago for fear of Brexit not taking place at all may well now vote against her as they sense their preferred option is achievable. This is the problem for the Withdrawal Agreement on the other side of the equation too. Some who supported the deal last time now feel that they can achieve no Brexit at all if they vote it down. From an investment point of view, this means that we are not increasing our low exposure to the UK at the current time. Our hunch is that we will avoid a no deal Brexit, but the risks are too great for clients at this time, and we are happy invested elsewhere.
US
The Federal Reserve completed its reversal to a fully dovish stance this week, saying that it no longer expected to raise rates this year. It also expects only one rate rise in 2020, and this change of direction has taken some by surprise. Markets clearly love it – tightening of liquidity is never what they are looking for – but a second thought provides reason for caution. The developments clearly signal a significant level of concern over the global economic outlook from the US central bank as Europe and China have exhibited serious signs of weakness of late. Despite the short-term support that the move might provide for markets, for many this is raising concerns that a US recession may be on the way earlier than expected and is creating an air of nervousness. We are now faced with several technical indicators that point in that direction, with inversions close across parts of the yield curve in the US – a pretty reliable warning sign in the past. Equity markets are buoyant, but the bond markets seem to be sending a different message about tepid levels of growth, and this disconnect is adding to investor unease. If the US consumer holds up, we might have a period of stability, but we are reaching the end of a strong first quarter for risk assets with no more clarity about how things might pan out this year. What seems certain is that this is not an environment in which to chase index returns.
Investment Line is written and edited by members of the Mattioli Woods Group investment committee and is for information purposes. It is not intended to be an invitation to buy, or act upon the comments made, and all/any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances. The value of investments and the income from them can go down as well as up, and you may not get back the amount invested. Past performance is not a guide to future returns.
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