Markets lifted by US-China trade and Brexit breakthroughs but deep economic risks remain

Receding political risks look likely to keep market spirits up for the rest of 2019 but be warned: global growth continues to slow and corporate investment remains weak while the props for growth – reforms, tax cuts, fiscal spending – look shaky

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A trader on the floor of the New York Stock Exchange on September 16. Photo: AFP

Published: 11:00pm, 25 Oct 2019Updated: 1:13am, 26 Oct 2019

As we enter the last quarter of the year, investors are beginning to speculate on whether equity markets will enjoy a lift into the end of the year. Bond yields and equities are indeed rising, and investors are starting to worry less about the risks to the market and the economic outlook, nearly all of which are political. So, what is behind this lift in market spirits?

For a start, political risk has been alleviated. The phase-one trade deal between the US and China was welcomed by markets, even though it lacked detail on many of the real sticking points in negotiations. There is an increasing chance that the agreement will be formally signed in the middle of next month at the Asia-Pacific Economic Cooperation meeting in Chile.

While the deal may be light on substance, it does suggest that phase two will follow and that, in the meantime, there will at least be a hiatus in the escalation of tariffs between the two nations.

Then there is Brexit. British Prime Minister Boris Johnson has managed to do something his predecessor could not, and get Parliament to pass an action on the path towards Brexit. The outcome is still far from certain, but it adds to market sentiment that political will is converging rather than diverging.

Overall, Brexit has been a fascinating political soap opera that has created a big splash in financial headlines, but small ripples when it comes to the effect on global markets.

Underpinning this is the expectation that central banks will continue to play a supporting role in keeping growth ticking along and that, even if they are not meeting inflation targets, are at least keeping deflation forces at bay.