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Global Markets to 10 June 2019


Highlights

  • Financial markets react to further US trade tariffs as Washington turns its attention to Mexico
  • The latest US jobs report reignites concerns that the world’s largest economy may be slowing down
  • In the US Treasury market, yields continue to fall after a weaker-than-expected US jobs report and continuing trade tensions
  • In the UK, the Labour Party holds on to Peterborough in a by-election, while the suspension of a significant UK Equity Income Fund makes the headlines
  • In the commodity markets, oil prices climb following signs that OPEC is close to agreeing to extend an output production cut and as Russia has pipeline problems
  • Bond markets suggest that a recession may be imminent, while global equity and credit markets appear to be ignoring the signs.

Global Market Summary

Ongoing discussions about US President Donald Trump applying tariffs to China – and now Mexico – continue to hamper business confidence and affect the direction of financial assets; last week the President shifted his focus to Mexico, threatening trade tariffs unless both parties can agree on a deal to stop illegal immigrants from entering the US.

There are fears that these latest tariffs may cripple a number of US businesses and raise the prices of everything from cars to daily produce for American consumers. However, following lengthy negotiations, Mexico has agreed to step up its efforts along the southern borders and to take action against human smuggling and traffic organisations.

The tariffs that the US was scheduled to implement on Monday against Mexico have now therefore been suspended. However, it has been made clear that the President could easily reinstate them if there were any reason to believe that Mexico had breached its commitments

As far as China is concerned, US Treasury Secretary Steven Mnuchin has indicated that the President will decide whether or not to levy additional tariffs on China once he has met with President Xi Jinping later this month. The situation is clearly complicated: a bilateral treaty could be agreed at the G20 meeting, but the real problem is to do with the complexities regarding future technologies.

President Trump has openly discussed controlling the global spread of Huawei technology in the press and media – something which has intensified the already existing tensions between the two countries. Chinese President Xi Jinping has adopted a hard line, recently stating that there will not be a “forced surrender of technology”. The two superpowers are certainly going through a difficult period in their relationship. However, on Friday Xi Jinping referred to President Trump as his friend, going on to say that he did not think that the US was interested in breaking economic ties with his country.

Fundamentally, it will come down to whether or not both parties can agree to – and then adhere to – a trade tariff arrangement. This currently seems unlikely, leading to some commentators suggesting that a no-deal scenario might be better than a bad deal. Regrettably, trade sanctions are likely to remain in force for many years – if not decades – to come.

Disappointing US job numbers for the month of May affected market sentiment last week: it was reported that the US had only created 75,000 new jobs – significantly lower than the expected figure of 185,000. Furthermore, the previous two monthly reports were revised down by a significant margin, igniting fears that the world’s largest economy could be showing signs of fatigue. At the same time, the US unemployment rate remains at a 50-year low.

Escalating trade tensions, the sluggish US jobs report, below-target inflation and concerns over faltering economic growth will all be scrutinised by the Federal Reserve Bank, which has already indicated that it is prepared to cut interest rates if necessary. A rate cut at the end of July cannot, therefore, be ruled out.

The US Treasury market reacted to the disappointing job numbers – yields retreated still further. Similarly, Germany’s central bank saw the 10-year Bund yield fall to -0.26%. Elsewhere, Australia and India took action and cut rates this week, possibly reflecting our current position in the global monetary cycle.

It now seems that whenever an opportunity arises for a country to cut interest rates, it is likely to do so, with central banks taking evasive action.

In the UK, two important events monopolised the headlines. Firstly, the Peterborough by-election which saw Labour hold on to the leave-voting seat, but only by a small majority of 683 votes. Nigel Farage’s newly-formed Brexit party came second, pushing the Conservatives into third place. The results suggest that voters are deserting the two mainstream parties in droves, while the success of Mr Farage’s party can be attributed to the Prime Minister’s failure to deliver Brexit. Her successor is likely to face the same challenges.

It may well be that the tide has turned in the UK and that age has become a more important factor than social class among voters. The era of generational loyalty to one or the other of the two leading parties may now be over. Younger voters now appear to be looking at the real issues of the day, which could mean that large-majority victories by any one party in general elections could be a thing of the past. This would lead to long periods of coalition governments – similar to what happens in Europe.

Secondly, Neil Woodford (of Woodford Investment Management) announced that he was suspending his flagship fund – the £3.7 billion Woodford Equity Income Fund –, sending shockwaves across the UK financial market.

Mr Woodford’s fund had at one point ballooned to £10.2 billion, but he now appears to have dug himself into a hole. Three main issues appear to have affected his ability to manage his fund successfully in recent times. Firstly, the fact that his holdings were in illiquid assets. Secondly, a spate of disappointing corporate earnings numbers and profit warnings from some of his largest quoted positions. And thirdly, his portfolio positioning based on the particular outcome that he predicted for Brexit.

All of this is against a backdrop of the fund receiving some very large redemptions. So in the interests of its remaining unit holders, Mr Woodford has decided to close the fund. Unfortunately, his fund has also been withdrawn from many leading institutional buy lists, which is likely to spark further redemptions once the fund reopens.

It is thought that Mr Woodford is currently going to every effort to reposition his fund and create a large liquidity pool to give both institutional and retail investors the opportunity to sell their units once it reopens.

This state of affairs has created a wave of anxiety across the financial industry and disappointment among investors and is likely to have repercussions way beyond Woodford Investment Management.

History tells us that over long periods of time, occurrences such as this create periods of despondency and mistrust across the marketplace. One such example is the collapse of the Long-Term Capital Management hedge fund in the 1990s.

Hopefully, the fund will reopen soon and trading will resume, meaning that investors will be able to make a judgement call and decide whether to remain or sell their positions within the fund.

In the commodity markets, the price of oil gained some ground after hitting a five-month low. This can be attributed to Saudi Arabia signalling that OPEC could extend its output reduction deal. At the same time, Russia has sought to reassure the market that recent contamination at its Druzhba pipeline is unlikely to force the price of oil up any further.

Finally, uncertainty continues as to whether or not we are heading for a recession. Renewed trade tensions, below-target inflation and weakening economic data have all led to a fall in western sovereign bond yields, creating a backdrop of negative real bond yields.

Global equity and credit markets, however, appear immune to the problems plaguing the bond markets.

But while the US and China coming to some sort of agreement on trade tariffs by the end of June is still possible, the issue of technology will remain a factor in the overall equation for many years to come, given the significance of the current technology revolution.


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.

If you would like to hear more about our wealth management services then please do not hesitate to call us on 0207 337 1390 or contact us via email. We would love to hear from you.

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