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Looking Past the Political Noise

30 September 2019EconomicsPoliticsAsset Allocation
  • Citi analysts believe the mild negative response to recent events – Trump impeachment inquiry and UK's supreme court declaring parliament suspension as unlawful – is revealing of how markets have braced for bad news.
  • US Democrats launched a formal impeachment inquiry against President Donald Trump last Wednesday, suggesting "he has violated his oath of office and obligations under the Constitution". The S&P 500 index which closed -0.84% on Tuesday ahead of the announcement subsequently pushed higher on Wednesday, gaining 0.62%.
  • Focus in Europe meanwhile was on the UK parliament after the Supreme Court declared PM Johnson's parliament suspension as "unlawful" last Tuesday. The FTSE 100 index lost 0.47% on that day itself and was almost flat at -0.02% on Wednesday.
  • Global equity markets also reacted calmly to the largest one day gain in the price of crude oil in a decade. The MSCI World index declined 0.26% on 16 September but subsequently rose 0.13% the next day.

    Looking Past the Political Noise
    Past performance is no guarantee of future results, real results may vary.
  • The calm response in markets in part signals investor pessimism, measured by significant equity fund outflows this year.
  • While US talks with China and Brexit deadline in October are yet further opportunities for uncertainties to rise, looking back to the variety of threats - including a potential widening of the trade war to Mexico and Europe - the trade risks did not unravel fully as feared.
  • As such, Citi analysts believe that given the drop in bond yields and thus reduced fixed income opportunity, a tactical underweight in equities seemed too cautious and have raised its allocation to neutral.

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