Cambridge Weekly Update – 2nd December 2019

Markets are driving the markets – will the economy keep up?

It has been another quiet week in capital markets, which may be a surprise given the political shouting about the General Election. As we have written before, the recent rally in risk assets is at odds with the still slowing global economy, leaving many uneasy about potentially overvalued asset prices. For the moment, investors seem to be pondering where to go next. Bond markets have calmed down after a couple of weeks of volatility. Equities continue to edge higher and, in the US, have moved up to valuations not seen since the end of 2017 – when talk of ‘irrational exuberance’ was rife. This time around, markets are definitely getting ahead of the economy – investors are placing a lot of faith in global production and profits turning.

Election manifestos: taking stock for investors

Britain heads to the polls in two weeks. Boris Johnson’s Conservative party entered the election campaign with an average 11-point lead over Labour in opinion polls. Despite all the well-publicised drama since then (leaders’ debates, endless Brexit, unaffordable spending plans, no shows and no apologies), that lead has remained pretty consistent, with some pollsters reporting a widening and others a narrowing. According to the betting markets, the odds of a Tory majority after the 12th of December are around 70%, a slight increase on a week ago.

Market optimism lacks validation from US and Chinese profits

Hopes of a resolution to the US-China trade war took a blow this week. As we have written before, the ongoing troubles in Hong Kong presented a difficult issue for negotiators – with US politicians picking at Beijing’s sore spot by backing Hong Kong protestors. The US President signed the bill on Wednesday which threatens sanctions on Chinese and Hong Kong officials deemed responsible for human rights violations.

Read the full Commentary here