Central banks turn on the taps

You wait months for an interest rate cut and then they come along at once. Two so far from the US Federal Reserve with the probability of a third at the next meeting later this month rising by the day. The likelihood of US interest rates heading even lower has increased as a string of downbeat economic statistics has confirmed that the global economy is slowing. This chart shows how the Fed’s planned normalisation of monetary policy has been aborted with rates not even half the level they reached at the last cyclical peak in borrowing costs. Indeed, if you run this chart back 50 years you will see that this “lower peaks and lower troughs” sequence is now decades old. No wonder that central banks around the world are calling for governments to use fiscal easing to support their increasingly desperate efforts to kickstart growth.

Source: Refinitiv, as at 8.10.19

Where next for the oil price?

The chart here of the oil price during the third quarter is probably not what you would have expected if someone had told you at the end of June that 5% of global oil production would be taken out by an attack on a key Saudi production facility by forces unknown (but very likely Iran). This dramatic escalation of tension between the two major powers in the Middle East would in years gone by have resulted in panic in the world’s financial markets. You can see on the chart when the attack happened but if you didn’t know what had taken place you would not think this three-month period were anything unusual. The reality is that Shale production in North America has changed the energy landscape. No-one pretends a war in the Middle East would be helpful, but the region is not the key driver of markets that it used to be.

Source: Refinitiv, as at 30.9.19

% (as at 30 Sept) 2014-15 2015-16 2016-17 2017-18 2018-19
Brent Crude Oil -50.2 2.0 18.4 45.1 -26.3
Past preformance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of an investment.

Trade War – who pays the price?

Other than geo-politics, the key influence on financial markets over the summer has been the ongoing trade dispute between the US and China. Tariffs and uncertainty over when or whether a resolution can be found are starting to show up in the hard data. The decline in manufacturing activity around the world spooked investors at the beginning of the current quarter. Fears of a recession are mounting. Clearly a trade war is bad news for everyone, but it is interesting how some countries are more vulnerable than others. Most of China’s exports go to countries other than the US, making it more resilient than some had thought a year or so ago. America, too, as a big self-contained economy, is better placed than many. Hardest hit are the open trading nations for which exports are a key contributor to GDP. Germany is the most obvious example, with Italy and Japan also significantly exposed.

Source: Refinitiv, Fathom Consulting as at 30.9.19. Impact on GDP of a one percentage point drop in world trade.

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of an investment.

 

 

Acknowledgements:

I would like to thank the many knowledgeable and experienced people within the wider Fidelity organisation who have helped me develop the ideas in this Investment Outlook. The views here are based on the house view of Fidelity’s investment team, overseen by Paras Anand, Anna Stupnytska and Wen-Wen Lindroth. However, it is written for a UK personal investing audience and the ideas are linked explicitly to the Select 50 list of our preferred funds, which we consider the best way for our investors to implement the ideas discussed in the Outlook. I would like to thank the following for their assistance: Gary Monaghan, investment director in Hong Kong; Jeremy Osborne, investment director in Tokyo; Leigh Himsworth, portfolio manager in the UK; Neil Cable, Head of Real Estate; Kasia Kiladis, investment director for US equities; Natalie Briggs, investment director for European equities; Bill McQuaker, multi-asset portfolio manager.

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