Global Weekly: Disappointing climate conference; markets rise on trade deal

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The UN Climate Conference in Madrid ended last week. The aim was to set rules for carbon markets, but they didn’t succeed and the decision has been postponed to next year. According to UN Secretary Antonio Guterres, “the international community lost an important opportunity to show increased ambition on mitigation, adaptation and finance to tackle the climate crisis.”

It is a disappointing outcome, especially given the gap between current progress and the global goals to limit global warming. There are 177 companies that have pledged to cut emissions, in line with the 1.5 degree target that is part of the Climate Ambition Alliance. This includes companies such as DSM, Danone and Orsted.

Financial markets did not react much to the disappointing results of the climate conference. They reacted more to the outcome of the UK elections, which has reduced uncertainty about whether the British will go through with Brexit. Markets also reacted to the announcement of the first-stage trade deal between the US and China. The US has removed the threat of new tariffs, and China has agreed to purchase US farm goods and other products. As a result, stock markets rose on Monday.

While we saw the US and emerging-markets stock indices rising further, European stock markets halted their ascent after Boris Johnson revealed plans to write into law that Great Britain will leave the EU at the end of 2020 and will not extend the transition period. This would mean that a ‘hard’ Brexit is still possible. The British pound also lost some of its gains. In the course of the week, markets softly retreated, underlining the old saying: ‘Buy the rumour and sell the fact.’

As the holiday period approaches, market are decreasing and news flow is petering out. Having said that, FedEx still had an unpleasant surprise for shareholders. It issued a profit-warning on lower than expected volumes, due to the loss of Amazon as a client and higher than expected costs to adapt to seven-day delivery. FedEx share prices declined by 10%. And, on Tuesday, Unilever announced that they will miss targets, as a result of the global economic slowdown, especially in south-Asia. Unilever shares declined by almost 6%.

Bonds: market now more relaxed

Financial markets are ending 2019 in a much more relaxed mood than they started it. Risk premiums have come down over the last few weeks, reaching lows for the year. This decline was seen in both investment-grade corporate credit and in the more risky markets of high-yield and emerging- markets bonds. Yields on German and US government bonds, which are safe havens for worried investors, continued to grind higher. Bond markets gradually moved to expect stable, not falling, inflation during December.

It looks like investors may continue next year to focus more again on economic fundamentals, instead of unpredictable geopolitical tensions. UK election results and the US-China phase-one trade agreement, however, do not include any guarantees. Meanwhile, Trump’s impeachment does not stand much chance of passing in the US Senate. But it does mark the beginning of a tumultuous presidential election year.

In terms of economic fundamentals, investors should notice the damage that geopolitical uncertainty has already inflicted and it will likely continue to dominate over the next few months, before any meaningful recovery develops. Central banks have worked hard to prevent any damage turning into a real recession threat.

While consumer confidence has been little affected, business confidence has dived. It will need to recover from very low levels before corporate spending fully bounces back. A final round of monetary easing may be needed, somewhere in the first quarter, to make sure that the global economy continues to heal. In these circumstances, corporate bonds seem to be in the best position to benefit.

If economic growth accelerates, any further rise in (German) government bond yields would continue to be offset by lower risk premiums, as the outlook for companies would improve. If economic growth disappoints, which seems more likely, the European Central Bank will help, pushing yields lower and stepping up the direct purchases of corporate bonds. (This programme was restarted in November.) Within the more risky bond segments, we continue to be careful with high-yield bonds, where expensive markets look vulnerable to setbacks. We are more constructive on emerging-markets bonds, where leading indicators have been the first to roll over and are leading the global pack.