Global equities reacted very negatively to the Federal Reserve’s first cut to interest rates since 2008 which occurred on the last day of July 2019. The cut itself, although modest, was not the cause for concern, instead the accompanying forward commentary held out little hope for any further downward moves for the foreseeable future. With Donald Trump still seemingly intent on escalating the trade spat with China and the knock-on effect this is likely to have for global trade this is not what markets wanted to hear. Particularly troubling was the rhetoric coming from the Trump camp which prompted Chinese authorities to not only curb Yuan strength but also to instruct state owned companies to cease the import of US agricultural products. Without the safety net of strong central bank commitment to action the equity market reaction was always going to be harsh.
In Europe, and in particular Germany, markets also clamoured for looser fiscal policy to stem what is an increasingly worrying economic trend. Once Europe’s exporting powerhouse the area’s largest economy is now one of the hardest hit by the general economic nervousness witnessed globally. Not only has there already been one quarter of GDP decline, export numbers now suggest the next may have a similar trajectory meaning Germany has, or is about to, enter a technical recession. The hope has always been that the country’s strong balance sheet will be used to prop up internal demand and reports have swirled suggesting a €50 billion intervention. So far, however, there have been no firm commitments and certainly no timescales which also contributed to the weak equity markets in August.
Much will depend on the outcome of the US trade talks and the underlying health of the Chinese economy. Other political events also have the ability to determine the next economic move with both Brexit and Italy likely to be influential. While Sterling recovered some of the losses seen over the past 3 months, Boris Johnson’s aggressive approach still makes it almost impossible to determine the final outcome. In Italy Deputy Prime Minister Matteo Salvini’s similarly confrontational approach looks like it may have back-fired with the Democratic Party and 5 Star, at the time of writing, moving ever closer to an amicable agreement and hence a more market friendly coalition. The result was a strong recovery for Italian equities toward the end of the month.