Market Review June 2019
During June, we have seen much stronger than expected employment numbers in the US, and positive industrial production data from Europe, signalling that the global economy is perhaps in better health than suggested by the negative long-term bond yields in many parts of the western world.
As we head into the summer months, the enthusiasm surrounding the equity markets is likely to continue following news of the resumption of trade talks between the US and China and the postponement of further tariffs and an easing of restrictions on the politically sensitive Huawei. In addition, dovish central bank positioning globally added further fuel to the equity and bond markets.
Despite the positive undertones, the fact remains that the trade situation between the US and China has yet to be resolved. As previously mentioned, the situation seems to stretch beyond trade and is actually more about jostling for their respective positioning in the world. On some measures, China is expected to overtake the US to become the largest economy in the world in 2020, with this in mind this fractious relationship is expected to dominate global geopolitics for years to come – with or without a trade deal!
On the rate front, despite there being no actual rate activity in June, it was an interesting month with the Federal Reserve, European Central Bank (ECB) and Bank of England all making announcements. Although he has no actual power over rates, this didn’t stop Trump once again weighing in on matters; this time accusing the ECB of trying to prop up the European economy and gain an advantage over the US. As several commentators have said, for someone who sees the world in such binary terms as Trump, the complex world of economics is reduced to a simple equation: if another country is winning, the US must somehow be losing.
Trump directed his criticism at ECB President Mario Draghi, who said in a speech that additional stimulus will be required to help Europe withstand economic challenges, including mounting protectionist threats stemming from the US/China trade war. Draghi’s statement not only talked about rate cuts but also said the Bank’s focus is now on how to implement stimulus rather than whether it should stimulate.
This sentiment should further enhance the appeal for risk assets, however cautious optimism is perhaps wise as Europe looks the most vulnerable region to further trade war escalation with Trump already making noises about the auto industry and, despite Draghi’s comments, scope for policy support looks limited.
Meanwhile, Trump also continued his attacks on his own central bankers, urging Fed Chair Jerome Powell to cut rates and restart crisis era stimulus programmes, threatening demotion if he ignores this ‘advice’ – and there are signs this barrage might be starting to bear fruit. While the Fed left rates on hold, policymakers said uncertainties about the outlook have increased and they will act as appropriate to sustain the expansion, with one member of the FOMC (Federal Open Markets Committee) advocating an immediate cut. Powell faces a massively difficult task, with the June meeting showcasing how he is having to navigate between a hostile Trump on one hand and bond markets on the other – the fact he appears to have come through the latest episode without overly antagonising anyone is some achievement.
However, his task looks set to become ever-more challenging in the coming months, especially with an election on the horizon. We are now in a situation where the Fed and markets appear out of sync: bonds rallied significantly on trade fears but the Central Bank currently sees zero chance of a US recession. Some commentators now believe we could see as many as three rates cuts in the second half of this year – it was only six months ago the Fed was predicting a couple of hikes in 2019!
Finally, closer to home, the Monetary Policy Committee (MPC) voted to keep rates on hold at 0.75% in June, warning that UK economic growth could fall to zero in the second quarter. Should Brexit pass smoothly, the MPC said rate rises would be required at a gradual pace and to a limited extent to maintain its inflation target of 2%. On that very matter, the race for Prime Minister has come down to just two, Boris Johnson and Jeremy Hunt, and with Johnson the bookies’ favourite, the likelihood of a hard Brexit seem to have increased.
From an investor’s viewpoint we still feel there is substantial opportunity in the markets and so we believe maintaining an approach of cautious optimism will best suit investors over the long-term. By this we mean maintaining exposure to a well thought out and diversified portfolio along with spreading risk across asset classes and regions. Trying to time the markets could lead to loss or missed opportunity and so we maintain our tried and tested philosophy of long-term, predominantly active investing with a focus on reputable and high quality fund managers that are also able to offer some resilience during side or down trending markets.
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The information contained in this article is intended solely for information purposes only and does not constitute advice. While every attempt has been made to ensure that the information contained on this article has been obtained from reliable sources, Vizion Wealth is not responsible for any errors or omissions. In no event will Vizion Wealth be liable to the reader or anyone else for any decision made or action taken in reliance on the information provided in this article.
