What caught our eye in September 2019

Major political and trade issues continued to dominate news, with a trend toward escalation rather than resolution. UK politicians found ever more extreme ways in which to disagree with each other, with the UK Supreme Court dragged into the mire after Boris Johnson tried to resolve the impasse by removing Parliament from the process entirely. Across the pond, Democrats moved towards impeachment proceedings over Trump’s ill-advised call with Ukranian President Volodymyr Zelensky.

Despite geopolitical uncertainty, September was generally positive for equity markets. Indian and UK stock markets led the way, the former boosted by a surprise cut in Corporation Tax and the latter by sterling’s Brexit-related weakness, with currency briefly below $1.20. With risk appetite returning, fixed interest lost some ground, but the real loser was gold, falling 4% after months of strong gains.

Away from the headlines, Carlyle Group’s algorithms showed a sharp rise in the use of the term ‘late cycle’ to describe the state of the global economy. Some saw this as indicative of the self-fulfilling prophecies that can precipitate the end of a cycle, i.e. if enough people believe that the cycle is about to end then the actions that they take, such as reducing investment, cause the very recession they fear. This is certainly valid, as markets reflect sentiment as much as data. However, many indicators are nowhere near the levels typically seen before a downturn. We continue to monitor closely.

We are also monitoring developments in the oil industry. The Wall Street Journal reported that 28 oil and gas producers had filed for bankruptcy by September, equalling the number for the whole of 2018. And by August, 5.7% of energy companies with junk-rated bonds were defaulting, the highest level since 2017, with the metric “considered a key indicator of the industry’s financial stress”.

WSJ posited that these troubles are because companies have taken on debt to fund expansion, relying on a rise in oil prices to make that debt serviceable. If this is the case they are creating a rod for their own backs, because rapid advances in fracking technology seemed to keep a cap on the very price that they need to rise.

However, another event in September cast things in a different light. After the drone strike on Saudi oil facilities, the oil price rose 20% in a day (exactly the sort of price move that the WSJ said was needed for certain shale producers to survive), but the price fell back to pre-attack levels within days. This means that perhaps the frackers aren’t impacting the market quite as much as has been reported, and industry bankruptcies may not be as threatening to the global economy as they first appeared.

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