Weekly View - Impeached !
Donald Trump became the third US president to be impeached. The majority-Democrat House of Representatives charged him with abuse of power and obstructing Congress last week. Once the Democratic House Speaker Pelosi releases the articles of impeachment to the Republican-majority Senate, the final trial that determines whether Trump is removed from office can commence. Given the clear bipartisan nature of the trial, we expect it won’t get past the Senate. If anything, the whole process could end up penalising Joe Biden’s run for the Democratic ticket, given his son’s association with the inquiry.
This year has been a stellar one for developed-market equities across the board, with gains approaching +30% in both the US and Europe, despite flat earnings growth. Crude oil was the only major asset class that delivered higher returns (about +35% by 19 December). Volatility has reverted to low levels and in contrast to their early 2018 crash, short volatility index funds ended 2019 on a high, up +65%. While markets fell in 2018 despite a rise in earnings, this year stock indexes reached new highs, but earnings barely grew. News headlines continued to direct market movements throughout the year. Last week, Boris Johnson used his new mandate to write into law the impossibility of an extension to the Brexit transition period, which ends December 2020. Sterling erased all post-election gains on renewed fears of a cliff-edge Brexit as a result and Team UK won’t be going to Davos next year. We prefer playing the UK through equities rather than bonds or currency.
Scandinavian central bankers held their final 2019 meetings last week in Sweden and Norway. While Norway kept interest rates on hold and showed no apparent appetite for hiking, Sweden’s Riksbank raised its main repo rate to zero following its five-year long negative-rate experiment. It will likely hold at this level for years to come. Meanwhile, macroeconomic indicators, including purchasing manager and IFO business climate indices enjoyed some last-minute 2019 improvements, pushing bonds higher. US and German sovereign 10Y-2Y and 10Y-3M yield curves steepened to levels not reached since the first half of 2019 or earlier. We are short duration in Europe and favour steepeners.