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Near-term market sentiment: Nervous, but still difficult to see where a trigger for a bear market might come from. After a run of ten consecutive days of new highs, the MSCI World index of global stock markets began retreating last week and has now seen five consecutive daily falls. The FTSE 100 is at a five week low. Other risk assets have also seen declines, with U.S high yield down 1.1% so far this month. The flattening of the U.S Treasury yield curve, so much a story of 2017, has faltered as investors dial down their forecasts for upcoming Fed rate hikes. Why? Lots of individual themes can be put together to form an explanation. These have included a renewed fear of a slowdown in China (which has hit commodity stocks in particular), to scepticism over the likely success of U.S tax reform, and fear of Lebanon becoming a new proxy battlefield for Saudi Arabia and Iran to fight in. But at its heart the downturn represents animal spirits, investors nervous of lofty valuations are taking profit and using geopolitical headlines to justify doing so. And why not? The combination this year of steady gains on global stock markets with very low volatility has produced good results for investors in absolute, and on a risk-adjusted basis. The MSCI World index remains 17% up in USD terms, 14% in local currency terms.

Outlook: As we have long argued, in the absence of a recession or a sharp rise in U.S and global interest rates, it is difficult to see what might cause a full-blown bear market for risk assets. A recession appears unlikely -at least in the near term – given the recent upgrades to world GDP growth by major financial institutions, and notably the IMF. The increase seen in global corporate earnings in third quarter results appears sustainable. Inflation remains tame, with the Fed the only major central bank raising interest rates at present at present. However, its monetary policy tightening – which includes the unwinding of its quantitative easing program- is likely to continue to be done at a cautious pace when Jerome Powell takes over from Janet Yellen, as chair, in February.

However: While a bear market appears unlikely, a correction – often defined as a fall of around 10% – may well happen as profit taking triggers a more broad sell-off, particularly by leveraged investors. But low risk-free rates (eg, bank account cash rates and core government bond yields) will limit the extent of the sell off, particularly given the positive news flow concerning global GDP growth and corporate earnings

Until then, those who have sold in recent days face a dilemma: Do they remain in cash, or shelter in short-duration bonds and other defensive assets that will produce a negative real yield until a correction takes place? What if a correction ends after a 5% fall – do they buy, or wait until a further fall? How long can they remain out of the market? Such are the poker-like perils of market timing. All of which points to the advantages of remaining fully invested in a multi-asset portfolio, which will offer protection should stock markets fall and relatively safe government bonds rally in response.

Sterling: the U.K currency continues to be a plaything of Brexit. The more markets sense that leading Brexitiers in the U.K government don’t actually want a deal with the E.U, the weaker the currency will become. It may be supported by higher Bank of England interest rates, but only if inflation continues to rise much above the 3% level recorded for both October and September.

The U.K. now has a $4 trillion retirement savings shortfall, which is projected to rise 4% a year and reach $33 trillion by 2050.

This in a country whose total GDP is $3 trillion. That means the shortfall is already bigger than the entire economy, and even if inflation is modest, the situation is going to get worse.

Plus, these figures are based mostly on calculations made before the U.K. left the European Union. Brexit is a major economic shift that could certainly change the retirement outlook. Whether it would change it for better or worse, we don’t yet know.

A 2015 OECD study found workers in the developed world could expect governmental programs to replace on average 63% of their working-age incomes. Not so bad. But in the U.K. that figure is only 38%, the lowest in all OECD countries.

This means U.K. workers must either build larger personal savings or severely tighten their belts when they retire. Working past retirement age is another choice, but it could put younger workers out of the job market.

U.K. retirees have had a kind of safety valve: the ability to retire in EU countries with lower living costs. Depending how Brexit negotiations go, that option could disappear.

Turning next to the Green Isle, 80% of the Irish who have pensions don’t think they will have sufficient income in retirement, and 47% don’t even have pensions. I think you would find similar statistics throughout much of Europe.

A report this summer from the International Longevity Centre suggested that younger workers in the U.K. need to save 18% of their annual earnings in order to have an “adequate” retirement income.

But no such thing will happen, so the U.K. is heading toward a retirement implosion that could be at least as damaging as the US’s.

Near-term market sentiment: Still bullish. Third quarter corporate earnings have been strong, particularly for the large U.S tech stocks that have been leading the S&P500 to new highs throughout the year. Brent crude is over $60 a barrel on speculation that Saudi Arabia and Russia are happy to extend their current output caps. Industrial metals are responding to strong demand and supply cut backs in China, as Beijing attempts to limit excess production. There is progress in Washington over President Trump’s plans to reform and cut taxes. In Spain, Prime Minister Rajoy appears to have trumped the Catalan separatists by offering regional elections that may neutralise the recent referendum. Investor confidence in risk assets continues.

As I wrote in the last note, the key arguments that support further stock market gains, and continued demand for higher yielding bonds, are:

Global GDP growth is strong. Last month, the IMF upgraded its estimate of world GDP growth to 3.6% over 2016. It had been 3.2% at the start of the year.
This feeds through into higher corporate profits, which supports stock market valuations and company’s credit ratings.
Bank account cash rates and bond yields look set remain low, because low global inflation means that there is little pressure on central banks to raise interest rates by anything more than token amounts.
Indeed, central banks everywhere remain in a deeply forgiving mode as far as investors are concerned. In the U.S, the Fed’s unwinding of its QE program, due to start this month, will be done at a slow pace in order not to raise bond yields and hurt economic growth. The likely replacement of Janet Yellen as Chair of the Fed is Jerome Powell, a known dove on monetary policy.

In the euro zone, the ECB has announced an extension of Q.E until at least September 2018 (although at a reduced rate from January of EUR 30 bn a month of bond purchases).

The Bank of England looks set to raise interest rates on 2nd November by 25bps, and so reversing the post-E.U referendum cut. But many analysts believe the Bank will hold rates thereafter, in view of the weakening U.K economy and expectations that CPI inflation of 2.9% y/y will fall back over the coming months as the impact of last year’s fall in sterling on import prices works its way out of year-on-year price measurements.

Can this bull market persist? Sooner or later this bull market will end, perhaps prompted by a fall in bond prices if relaxed central bank monetary policy allows a steady upward rift in inflation. But this is not likely to be a problem over the coming 12 months or so, and with no clear trigger in sight to cause a sell-off of bonds that would then undermine equities, it is premature to take risk off the table. Annoyingly, even if one wanted to go into defensive asset classes it is difficult to find any at the moment that will deliver a real return (ie, after inflation is taken into account).

Brexit and sterling. The Brexit negotiations between the U.K and E.U appear to be at an impasse. This, together with the Bank of England’s likely unwillingness to raise interest rates in view of weakening domestic demand, means sterling may again become a ‘big short’. The next test for sterling will be December’s E.U summit meeting. If no agreement is made then to move talks on in order to discuss a transition arrangement, and the final trade deal that the U.K can expect to have with the E.U, sterling will suffer renewed pressure.

At the heart of the impasse is the U.K’s reluctance to agree the divorce bill before the E.U has first outlined what type of trade deal it will offer Britain. Like a game of poker, London clearly sees the amount it offers as a bargaining chip. Perhaps the only one it has of any significance. The E.U wants the bill to be paid first, so it is not linked to discussions on trade. The longer this continues, the more likely there is of a ‘no deal’ outcome to Brexit negotiations, which many economists see as being the most dangerous to the U.K economy.

Near-term market sentiment: Still bullish. Last week the MSCI World index reached a new all-time high. It is up 15.6% in USD, and 14.3% in local currency terms. The S&P 500, FTSE 100, and DAX 30 stock market indices also saw new highs last week, while the Nikkei 225 reached a 21 year high. Morgan Stanley reported an improved risk appetite amongst investors, which was has been illustrated by outperformance on Wall Street of growth-biased small cap and cyclical stocks over defensive sectors.

The key arguments that support further stock market gains, and continued demand for higher yielding bonds, are:

• Global GDP growth is strong. Last week the IMF upgraded its estimate of world GDP growth to 3.6% over 2016. It had been 3.2% at the start of the year.
• This feeds through into higher corporate profits, which supports stock market valuations and company’s credit ratings.
• Bank account cash rates and bond yields look set remain low, because low global inflation means that there is little pressure on central banks to raise interest rates by anything more than token amounts. The Fed’s unwinding of its QE program, due to start next month, will be done at a very slow pace in order not to raise bond yields.

It is, though, undeniable that the doom-mongers have some good arguments up their sleeves:

• Valuations on many risk assets are high by historic standards. (The bull’s response is that the argument misses the point, which is that with interest rates and bond yields low, investors have few alternatives if they are seeking income).
• The U.S economic cycle is long in the tooth, since the current period of growth began in early 2009 and is currently the second-longest period of expansion in its history. Unemployment is low at 4.2%, which in the past has led to rising wage costs, inflation and higher interest rates. (The bull’s response: this is not a normal cycle. Low unemployment is not feeding through into higher wages, due in part to the large pool of economically inactive people that are not included in unemployment data).
• Separatism and nationalism are on the march in much of western and eastern Europe. This represents a threat to free trade, as do the mercantilist trade policies coming from Washington and Beijing. (Bull’s response is to agree, but point out that so far Trump has not changed any existing trade arrangements and in Europe, President Macron leads an attempt across the region to liberalise economies).
• The IMF warned last week that the global economy is weighed down by too much debt, making its health very sensitive to any rise in global interest rates or bond yields. (Bull’s response: agreement. In the downward swing of an economic cycle, those in debt become crushed by their obligations and become forced sellers of assets).

Can this bull market persist? Sooner or later this bull market will end. We may be in the last phase, which the investor John Templeton describes as ‘euphoria’, after which comes the deluge. But with no clear trigger in sight to cause a sell-off, it is premature to take risk off the table.

Retirement savers with money in defined benefit pension schemes run by their employers have seen improving deficits stand still.

Britain’s final salary workplace pensions still have a black hole of £460 billion despite the gap between assets and liabilities closing by 35% this year.

These figures come from accountants PwC who track pension values with their SkyVal Index.

The analysis looks at the assets, liabilities and deficits of 5,800 direct benefit pension schemes in the UK each month.

Total assets in direct benefit schemes total £1.52 trillion, but £1.98 trillion is needed to cover the call on these assets from pensioners in the schemes.

Long-term real interest rates which are relative to inflation as measured by government bond yields have increased over September, which has led to a £50 billion reduction to liabilities since August month end. However, there was no impact on the deficit due to falling asset values over the month.

“The swing in the size of deficit from month to month is sensitive to small market movements, as demonstrated by the month to month volatility.”

Defined benefit schemes pay benefits to retirement savers based on their length of service with an employer and final salary. They also come with a guaranteed income life that is index-linked against any rise in the cost of living.

Many pension trustees are trying to reduce their liabilities by offering retirement savers golden goodbyes worth up to 20 times or more the annual pension value.

Your retirement income may be in danger if you have a final salary pension as a financial black hole threatens to keep swallowing cash.

Although many employer pensions are flush with funds and making good investment returns, concerns are rife about some others that are billions of pounds in the red.

In recent months, British Home Stores and Tata Steel have stolen the headlines as schemes that could do better – but they are not the only ones struggling.

Companies in the FTSE100 – Britain’s biggest firms – fell a further £95 billion into deficit last year. They are underfunded by £681 billion, says a study by JLT Employee Benefits.

And this is when only 53 companies actually pay final salary benefits to around 1% of their employees.

Wipe out liability

In the year, the companies paid £11 billion into their pension deficits, but JLT has calculated 41 of the FTSE100 companies could wipe out their liability if they suspended paying shareholders dividends for just one year and diverted the money to their pensions instead.

Financial watchdog The Pension Regulator (TPR) has wised up to this and threatened to take regulatory action against trustees putting shareholders before employees if the pension scheme is in the red.

The government has also threatened to bring in a new law to punish directors or trustees who ‘deliberately or recklessly’ fail to meet their pension obligations.

But no mention was made about this in The Queen’s Speech which laid out the government’s legislative programme for the next two years.