Global Markets to 5 August 2019
- Global stock markets retreat on Trump’s tariff threats and fears of Chinese retaliation.
- US interest rates are cut by 0.25 basis points amid concerns about the global economy and weaker inflation.
- For the second quarter of the US corporate earnings season, 76% of S&P 500 companies have reported positive earnings-per-share, with 59% reporting positive revenue surprises.
- Global bond yields repeatedly fall: cautious investors fear an escalation in the tariff tantrums and an error in central bank policy, and so flock towards safe-haven assets.
- In the commodity markets, the price of crude oil reacts nervously to trade war jitters and the price of gold bullion rises, while in the FX market, sterling drops to a near multi-decade low on no-deal Brexit fears.
- People are increasingly apprehensive about a seasonal stock market correction as dangers mount over a renewed period of trade war tensions between the US and China.
Global Market Summary
The global equity markets proved more volatile in the second quarter of 2019, following the strong gains recorded in the first half. Economic data has continued to weaken amid uncertainties over global trade, Brexit and mixed messages from central bank representatives.
In recent weeks, the relationship between US and Chinese authorities over trade talks has deteriorated: President Trump has ratcheted up tensions between the two countries with Washington threatening to impose a further 10% tariff on US$300 billion of Chinese goods.
Beijing has retaliated, vowing to implement countermeasures and giving rise to fears that a further period of tit-for-tat tariffs is about to commence – which could herald a further period of woe for the global economy. This will complicate matters further for Federal Reserve Bank chairman Jerome Powell in relation to future interest rate policy.
Last week, the Fed cut the federal fund rate by 0.25 basis points, the first cut since the financial crisis more than 10 years ago. In Chairman Powell’s press conference, he emphasised that the Fed’s decision to cut rates was a mid-cycle adjustment, and not necessarily the start of a lengthy cutting cycle.
There are, however, three important concerns. Firstly, Powell’s statement suggests that the Fed made a mistake in December by raising interest rates. Secondly, inflation continues to be stubbornly low – below the Fed’s target inflation rate. And thirdly, the Fed is extremely concerned about the risk to the global economy and President Trump’s ongoing trade war antics.
Needless to say, President Trump was highly critical of the Fed’s announcement and was quick to tweet that Chairman Powell had “let us down”, indicating that what he wanted was a larger rate cut. From a central bank perspective, however, the US economy is showing no real signs of weakness, inflation remains benign and the unemployment is at a 50-year low. So there does not appear to be any immediate need to cut rates aggressively.
Corporate America also seems to be in good shape. Most of the second quarter earnings figures show that 76% of S&P 500 companies have reported stronger-than-forecast quarterly profits while 59% reported positive revenue surprises. But that did not stop last week’s S&P posting its worst weekly performance this year.
As for the bond markets, declines in bond yields over the past week have been dramatic: the US Treasury 10-year benchmark bond now yields 1.87%, while Germany’s entire bond market is now in negative territory. In fact, in the US, Japan, Germany and the UK, the two and 10-year government bond yields are all currently trading below the official overnight rates set by their respective central banks.
As a result, other safe-haven asset classes – such as gold bullion – have benefited from cautious investor sentiment, while the price of crude oil has fallen sharply on expectations that a period of hostile trade sanctions will eventually lead to a further weakening in the global economy.
In the UK, Boris Johnson’s election and fears of no-deal Brexit have seen sterling slide to its lowest level since 2017. Crystal-ball gazing and trying to predict the direction of sterling over the coming months could prove unwise. But in the event of a no-deal Brexit, the pound could easily fall to as low as US$1.15, while a more positive outcome could see it trading higher – closer to US$1.46.
The situation is complex, and so many investors have decided to await an outcome before committing to a strategy. The focus will then shift towards other factors – such as the risks of a Jeremy Corbyn government, Scottish independence and the future of the UK economy.
As we enter the final few weeks of the summer, the threats of an escalation in the US-China trade war, uncertainties in relation to Brexit and mixed messages from the Federal Reserve Bank will all contribute to the nervousness of the global stock markets. This could create a further period of weakness – particularly when one considers that the S&P 500 has delivered negative returns in six of the past eight August.
But with the likelihood of further central bank intervention over the coming months, the markets could easily rally back towards their all-time highs as global investors begin to chase returns again in the global equity markets.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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