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Brexit, US/China trade spat and inflamed Middle East tension

European equities entered 2020 close to all-time highs following an incredibly strong rally throughout the course of 2019. Despite issues, such as the US/China trade spat and Brexit, still having the potential to derail the continued market rise both appeared closer to resolution. Phase 1 of the trade agreement was signed midway through the month while the UK formally left the European Union on 31st January. Unfortunately, January 2020 heralded a unique new set of problems with market moving potential not long after the new year began.

Unexpectedly the US inflamed Middle East tension when their military killed Iranian commander Qassem Solieimani prompting a market sell off and a steep rise in the oil price. Iran threatened retaliation which came a few days later hitting US military bases in Iraq as well as, perhaps mistakenly, shooting down a Ukrainian airliner taking off from Tehran Airport. Both nations, however, appear to step back from the brink of war and, as a more conciliatory tone was adopted, markets began to recover. But the recovery was short lived as news emerged of a new virus emerging in the Wuhan province of China a particularly troublesome timing as the Chinese Lunar New Year plans made containing the spread a logistical nightmare. By the month end the World Health Organization had declared the pandemic a global health emergency. With China now representing an estimated 16% of global GDP and Wuhan in particular an important link in the global supply chain, for many industries this outbreak clearly has the potential to impact economic growth. The quantum and duration of any slowdown will depend upon the Chinese authorities’ ability to contain its spread. With both service and manufacturing PMI’s in Europe showing some positive readings for December we will have to wait to see how meaningful this hit will be.

The coronavirus has introduced a high degree of uncertainty into how economic growth will develop over the course of 2020 as this will very much depend upon the eventual severity and duration of the outbreak. In the meantime, European companies will over the course of the next few weeks report their full year results but perhaps more importantly their expectations for the next 12 months. They may well express a similar degree of uncertainty but their thoughts will be none the less most welcome.