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Global Markets to 17 June 2019


Highlights

  • Global equity markets struggle to make further headway as safe-haven assets, such as sovereign bond markets, are in demand.
  • German Bund yields hit record lows following weak Chinese data and tanker attacks in the Gulf of Oman.
  • Tensions increase between Washington and Tehran over those tanker attacks in the Gulf.
  • In the UK, the Tory party leadership race commences with Boris Johnson the bookies’ favourite to win.
  • The Federal Reserve Bank, geopolitical risks and the demand for bonds are all prominent factors in this week’s market moves.
  • The June rally remains intact, but there is enough anxiety to create additional weakness for risk assets.

Global Market Summary

As the end of the month and the end of the first half of the year approaches, the backdrop for global equity markets is still relatively positive (though quite volatile at times). Trump’s tweets and statements continue to create commotion and periods of uncertainty, followed by corrective phases across the equity markets.

A few months ago, the financial markets were focused on three key issues: the easing of US-China trade tensions, dovish central bank policy and the benefits of lower crude oil prices. Unfortunately, two of these major issues – trade and oil prices – have been pushed to the forefront of the news in recent times.

Trump’s trade war with China has dampened market sentiment and discussions between the two superpowers have once again faltered. The US president also now seems to be setting his sights on India, condemning its high tariffs and demanding reductions. Furthermore, he has cautioned them against buying oil from Iran. However, postponing any action against the EU and agreeing trade settlements with Mexico and Canada have eased tensions somewhat.

The attacks on two oil tankers in the Gulf of Oman have created tension around the world, exacerbated by the US military releasing video footage of the episode which supposedly implicates Iran in the incident. Relations between Washington and Tehran have soured since President Trump took office in 2017 and this event will do nothing to help matters.

Nonetheless, central banks still seem to be managing to keep interest rates low during these stressful times. Indeed, the expectation is that US interest rates will soon be cut as the global economy weakens. It is, however, unlikely that this will happen at the next Federal Open Market Committee meeting (FOMC) on 18-19 June.

There are probably three reasons for the US central bank delaying the next interest rate cut. First of all, the G20 summit at the end of June could be when the US and China finally sign a trade agreement. Secondly, it probably wishes to resist political and market pressure. And thirdly, doing so might make them vulnerable to accusations that December’s rate hike was a mistake.

Although trade tensions have been the markets’ main concern in recent times, any trade agreement between Washington and Beijing could give risk assets a boost. Neither party is likely to concede anything as far as technology is concerned – the Chinese want their own independent technology and digital services, as does the West.

It obviously makes more sense for the Federal Reserve Bank to observe events as they unfold and wait for further economic data to be announced before taking any action. The recent weaker Chinese economic data and tensions in the Gulf will most certainly be foremost in the minds of the world’s central bankers. Consequently, it is more likely that interest rate cuts will be announced later on this year. This is what the bond markets are currently signifying as sovereign bond yields continue to tumble.

In the UK, the Conservative party leadership race is in full swing. Six Tory leader hopefuls now remain, with Boris Johnson the firm favourite to win having secured 114 votes in the first ballot. However, although he is gaining support every day, some commentators have suggested that his no-deal Brexit plan would lead to further problems, perhaps even triggering a general election. UK politics, the outcome of Brexit and the market more generally look set to experience a period of uncertainty.

The markets are currently giving out mixed signals: equities are behaving somewhat optimistically, while the bond markets appear more pessimistic. Trade war tensions, geopolitical risks and dovish central bank policy have combined to create mixed sentiments among investors.

This state of affairs is likely to continue throughout the summer months as events play out. However, risk assets (such as global equities and credit) are able to withstand such economic soft patches – if necessary, the US central bank can enter a period of pre-emptive policy easing.

This means that global investors can enter the second half of the year in the knowledge that the central banks will remain accommodative, trade tensions are likely to ease, Brexit will ultimately reach a conclusion and global equities will remain the asset class of choice as far as investment returns are concerned.


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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