Global Markets to 15 July 2019
- Wall Street continues its bull run after the Federal Reserve Bank’s dovish statement.
- The Dow Jones Industrial Average reaches 27,000 for the first time ever, while the S&P 500 hits an all-time high and trades above the 3000 level. These are historic milestones on the world’s largest stock market.
- US Treasury yields react to last week’s US central bank commentary, and government bond markets in general are responding to the probability of further rate cuts at global level.
- Crude oil prices climb as tensions between the UK and Iran increase over the seized Iranian oil tanker.
- The battle for the Conservative Party leadership continues with Boris Johnson expected to win.
- The outlook for the global economy has deteriorated over recent months, but the markets continue to believe that future central bank policy will assist in its recovery.
Global Market Summary
Global stock markets continued to rally, boosted by talk of a further period of interest rate cuts. In the US, Federal Reserve Bank chairman Jerome Powell indicated in a recent speech that concerns over global growth weakness continued to weigh on the economy. His remarks are a clear indication that the Federal Reserve Bank is now worried about a possible period of sustained weakness and is concerned about the effects that trade tariffs are having across the wider economy.
Powell indicated that overall growth appeared to have moderated in the second quarter, and the outlook has not improved in recent weeks. “Crosscurrents have re-emerged”, he went on to say, bolstering market expectations of rate cuts in July. Although his statement did not actually imply that further rate cuts would follow, any additional softening in the data beyond the end of this month would most likely encourage him to consider such a move.
As far as the markets are concerned, the Fed Fund futures have already priced in a quarter-percentage point cut, but they may well consider a 50 basis point cut if they thought that further trouble lay ahead. Powell also said that the Fed would act “appropriately” to keep the recovery on track.
The change in the Federal Reserve Bank’s tone since last year has obviously given a huge boost to market sentiment, resulting in equities rallying and bond yields falling. Another contentious issue has been President Trump’s interminable comments in relation to Fed policy and its reluctance to cut interest rates sooner. Jerome Powell has made frequent references to the Federal Reserve Bank’s independence and the risks of political meddling, resulting in a frosty relationship with the President.
But whatever happens, overall uncertainties in relation to global growth and trade continue to weigh heavily on the economic outlook and dampen inflation, meaning that Powell will have to take appropriate action over the coming months.
Elsewhere, more dovish sentiment from the Federal Reserve Bank pushed the Dow Jones Industrial Average Index and the broader stock market indices up to all-time highs: the Dow Jones hit 27,000 for the first time, while the S&P 500 broke through the 3000 level. With no discouragement from the Fed regarding the future direction of rates, the markets are likely to rise further. The only short-term constraint may be in the form of disappointing corporate earnings data: we have just entered the third quarter and corporate earnings announcements are being issued.
Regarding bonds, government bonds have been seemingly unstoppable this year. Bond yields are tumbling, and are a true reflection of the US-China trade tensions, increasingly sluggish global growth and the widespread belief that central bank policy has again changed, becoming more dovish in its outlook – something which will further affect bond market sentiment.
In Europe, Germany has sold Bunds at a yield of minus 0.26 % – the lowest on record for debt of this maturity. This negative yield means that investors who buy the paper will get back less than the amount they paid when the bond matures in 2029. This is in response to ECB President Mario Draghi’s comment in June signalling that the central bank is prepared to embark on more easing should the eurozone economy falter and fail to recover.
In the US, this week’s interest-rate futures are implying that there will be 0.75% of easing by early 2020, with bond markets reflecting this change in policy sentiment. But with people now believing that a cut in interest rates is imminent, any surprises could lead to a sharp rise in bond yields, and a correction in equity markets.
Equity and bond markets currently have very little room for disappointment – either through central bank policy or corporate profitability. We have therefore entered a period of elevated risk as the Fed decides on its next move and the markets navigate through the next round of corporate earnings announcements.
In the commodity markets, the price of crude oil continues to rise as traders focus on two factors. The first one is rising tensions between the UK and Iran following the seizure of an Iranian tanker suspected of breaking EU Syria sanctions and the announcement that the UK is sending a second warship to the Persian Gulf. And the second is Storm Barry which has been creating havoc in oil-producing regions, such as the Gulf of Mexico.
On the UK political scene, the battle for the Conservative Party leadership continues in earnest with Boris Johnson still expected to win on 23 July. Johnson remains the frontrunner with Conservative voters, who believe that he is the best person to beat Jeremy Corbyn in a general election and the most likely to deliver Brexit by 31 October 2019.
To conclude, the outlook for the global economy has deteriorated over recent months, but the equity markets have received a further “sugar rush” in the form of the central banks giving notice that interest rate cuts are imminent. This has made them more resilient. This support – combined with the knowledge that the US economy is not going to slip into recession any time soon – could result in a further melt-up period for the markets. The only negative over the coming weeks could be corporate profit disappointments and downgrades.
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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