06/11/2019 - -


Brexit and Trade Conflict: Deal instead of No Deal

In the trade conflict between the USA and China and in the Brexit poker between Great Britain and the EU, there were more indications in October of a rapprochement and a settlement than of the dreaded no deal. This gave the stock markets a tailwind.

In October the international stock markets performed broadly well. The German share index DAX rose 3.53% reaching an annual high. The broad European stock index Stoxx Europe 600, on the other hand, made only 0.92% progress. In the USA the S&P 500 index fell slightly -0.18%. The Hang-Seng index (Hong Kong) rose 0.89%. Overall equities worldwide measured by the MSCI World Index rose 0.22% - all index data on euro basis.

Equity markets were driven primarily by expectations of a provisional settlement of the US-China trade dispute. China agreed to purchase more US agricultural products in the future while the US in return refrained from raising various import tariffs up to 30%. However, the issue of Chinese state-owned enterprises was ignored.

In the USA the reporting season started better than market participants had feared. The expected earnings growth of companies in the S&P-500 remained negative but improved from -3.1% to -1.9%. The US economy also grew stronger than expected in the third quarter with growth of 1.9% (Q3/2018) mainly due to consumption which increased 2.9% year-on-year. In addition, the US Federal Reserve (Fed) lowered key interest rates again at the end of October by 25 basis points to a range of 1.50% to 1.75%, as the majority of investors expected. As a result, the US dollar depreciated by just under 2% against the euro.

The Fed also announced that it would not cut interest rates further for the time being due to decreasing economic risks. However, the majority of US economic indicators declined. For example, the purchasing managers' index for the manufacturing sector reached a ten-year low, retail sales and industrial production fell slightly compared to previous month and order bookings were slightly stronger.

In Europe, the British government and the EU surprisingly agreed on a Brexit agreement which had a positive effect on the mood on the stock markets. However, as the new agreement failed to gain a majority in the UK parliament, the UK requested an extension of the exit deadline until 31 January 2020 and the parliament approved new elections on 12 December. The euro area economy grew by 0.2% in the third quarter (compared to Q3/2018), slightly more than expected, but significantly less than the US economy.

The majority of economic data in Germany and the euro zone remained weak. The German ifo Business Climate Index reached a ten-year low of 94.6 points. The purchasing managers' index for the manufacturing sector in Germany rose slightly to 41.9 points and remained unchanged at 45.7 points for the euro zone but with clearly below 50 points both point to a shrinking economy. German industry reported a slight decline in incoming orders compared to previous month although industrial production increased moderately.

In China the economy grew 1.5% in the third quarter (compared to Q3/2018) which suggests growth of around 6.0% for the year as a whole - the lowest growth level since 1990. Various indicators such as the purchasing managers' index for industry, exports and imports also declined in China. However, industrial production grew significantly 5.8% year-on-year and retail sales also climbed 7.8%.

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