Market Analysis Dec 2019

The US equity realm enjoyed a robust Q4 marked by strong gains. The resolution of the US-China trade deal's "phase one" agreement significantly curbed trade uncertainty. This agreement, set to be formalized in January, mitigated new tariffs and moderated existing tariffs on Chinese goods by the US. China also committed to increasing purchases of American products, particularly in agriculture. Alongside these developments, the US economy exhibited steady growth with Q3's 2.1% annualized expansion and historically low unemployment levels dating back to 1969.

During the quarter, the Federal Reserve executed one interest rate cut, reaffirming the appropriateness of the current monetary policy stance. Forward-looking indicators, such as purchasing managers' indices, reflected modest expansion. The technology sector reaped substantial benefits from improved trade prospects, while the energy sector rallied due to rising oil prices. Conversely, real estate, which tends to be less correlated with economic growth, and industrials experienced more muted progress.

The Eurozone experienced a vigorous Q4 with a notable uptick in the MSCI EMU index by 5.1%. Economic data from Germany improved, adding momentum to the region's stock surge. The US-China phase one trade deal further bolstered the Eurozone's equity landscape. Sectors linked to economic growth, such as information technology, consumer discretionary, and materials, led the charge. In contrast, communication services, consumer staples, and utilities faced headwinds. Corporate actions, such as Unilever's sales growth warning and the merger of Fiat Chrysler and PSA Peugeot, influenced market dynamics.

Notably, Christine Lagarde assumed the presidency of the European Central Bank in November. In her inaugural address, she advocated for increased public investment to drive domestic demand in Europe. Economic indicators, such as the Ifo business climate indicator and the eurozone composite purchasing managers' index, offered mixed signals, while annual inflation inched up but remained below the European Central Bank's target.

The UK's political landscape took center stage in Q4, with the Conservative Party's decisive victory in the general election. This triumph reduced immediate political uncertainties and buoyed domestically focused sectors of the equity market. Notably, small and mid-cap shares thrived, and sterling witnessed a notable recovery from its prior lows. Q3 GDP figures indicated a rebound of 0.4% quarter-on-quarter, helping the UK economy evade a technical recession.

Risk appetite resurged, benefiting many economically sensitive sectors. However, the oil & gas sector faced challenges despite recovering crude oil prices. HSBC encountered difficulties due to factors including Hong Kong SAR's unrest, lower US interest rates, and company-specific issues. These dynamics influenced overall sentiment.

Japan's equity market witnessed a quarterly gain of 8.6%, though it lagged behind other major markets in December. Geopolitical tensions impacted sentiment but were balanced by positive signals related to the US-China trade deal. Foreign investment remained stable, aligning with the quarterly reporting season's meeting of expectations.

Japan's service sectors maintained strength, whereas manufacturing continued to grapple with challenges. Geopolitical tensions were counteracted by signs of possible US-China trade progress. Foreign investment remained steady through the quarter, as the quarterly reporting season generally met expectations.

Q4 saw heightened risk sentiment due to the anticipated US-China phase one trade deal and improved economic indicators. Consequently, government bond yields increased while corporate bonds demonstrated resilience.

The US 10-year yield rose to 1.92%, with the two-year yield dropping to 1.57%, reflecting growing economic optimism. Europe's 10-year yields also rose, with political risks impacting Italy and Spain. Corporate bonds delivered favorable performance, particularly high yield and investment grade bonds. Emerging market bonds excelled, driven by strong local currency bond performance as emerging market currencies rallied. Convertible bonds reaped the benefits of the positive market climate, with variations in valuation trends across different regions.