November was a bit of a relief month for equity and bond markets, being the first positive in eight months.

Summary

• Equity markets stabilise after October crash, but remain at levels last seen in late 2017.
• The US Federal Reserve (the Fed) is confusing markets with communications regarding neutral rates. In October it stated rates had “a long way to go” and in November it said current rate is “just below” neutral.
• The latest comments from the Fed was seen as opening a possibility for a pause in the hiking cycle 2019. If so, it will be bullish for equities and emerging markets and bearish for the US dollar.
• China and Europe’s economic slowdown continues as trade war uncertainty weighs on sentiment. Both areas’ Purchasing Managers' Indices (PMI) hit levels last seen in mid-2016.
• Worries about signs of US slowdown and actual slowdown in both China and the Eurozone means markets are treading water, waiting for developments at the G-20 summit. After the euro weakened further we opted to close our short euro position, but maintained our overall asset allocation stance.

Market update

The US Federal Reserve Governor Jerome Powell appeared to be trying to walk back his previous comments in October regarding the likely interest rate path, when he said that there was still a long way to go before the federal funds rate reached a neutral level. The market interpreted this to indicate that the Fed is likely to continue hiking well into 2019, and this contributed to the equity market instability seen in October. In late November Powell indicated that the current rate was just below neutral, which was taken as being significantly less hawkish.

Whatever the true position, it is likely that the Fed is attempting to signal to the markets that it needs to start thinking about the end of the hiking cycle at some point. It also creates optionality for the Fed in that, if a material slowdown does emerge in the US, it will have created the possibility for the Fed to pause at the very least.

In China, the manufacturing PMI hit the 50 level for the first time since mid-2016 and in Germany their PMI also hit their lowest levels in over two years. The US-driven trade war has contributed to the slowdown as uncertainties remain, but markets are hopeful that at the G-20 summit in Argentina on 30 November and 1 December, the so called ‘truce’ with China ameliorates the current situation.

Whilst these uncertainties do hover over markets, risk sentiment remains cautious with the US still seen as the safe haven. Key questions do remain though, about the possibility of the US joining Asia and the Eurozone in a slowdown mode, and if this materialises what is the Fed’s response function likely to be? Also, given the slowdown apparent elsewhere, what does this mean for further monetary policy stimulus? Does the European Central Bank, for example, have the ability to even consider changing their interest rate stance in 2019 as they have indicated? Can the US dollar continue on its strengthening path in the absence of any alternative safe havens, to the likely detriment of emerging markets?

With these issues forming the backdrop, November was a bit of a relief for equity markets with the MSCI All Countries index rising over 1%. As far as bonds were concerned, with US Treasuries rallying somewhat, the FTSE World Govt Bond Index finally had a positive month, the first in eight months, rising over 0.7%.

Portfolio strategy

On balance, a number of negative risks remain whilst there are also some current positives which means volatility is likely to continue. We maintained our overall asset allocation stance and only closed out our short euro position as we profited from the further weakness in the euro.