Global Markets to 24 June 2019
- It’s another good week for the financial markets, with several records set and milestones reached in stocks, bonds, gold and crude oil.
- On Wall Street, the S&P 500 Index reaches a record all-time high, energised by Fed talk of interest rate cuts and confirmation that Presidents Trump and Xi Jinping will meet at the G20.
- In the bond markets, the benchmark US 10-year Treasury bond yield retreats to a low of 1.973%, dipping below the psychological 2% level for the first time since November 2016.
- The price of US crude oil climbs sharply and sees its biggest weekly gain since December 2016 as tensions flare up between the US and Iran.
- In commodities, the price of gold bullion surges, while on the currency markets, the US dollar falls against a basket of leading global currencies.
- While the financial markets have rallied aggressively against the belief that further positive news is imminent, risk assets are left vulnerable to any short-term disappointment.
Global Market Summary
There was an abundance of statistical milestones on the financial markets last week, giving risk assets such as equities a further boost. In the US, confirmation that President Trump and his Chinese counterpart Xi Jinping will meet at the G20 in Osaka was greeted favourably by market watchers. And the US central bank’s decision to leave interest rates unchanged pushed the equity markets a little higher.
Although Federal Reserve Bank Chair Jerome Powell left the possibility of a rate cut later this year open, it is most likely that he will wait until after the G20 meeting and the publication of further economic data (such as the next set of US job figures) before making any major decisions.
The world’s two largest economies increasing the trade tariffs that they levy on each other is something that the central bank needs to monitor carefully – such actions will negatively affect the global economy over the coming months and years.
On Wall Street, the S&P 500 Index hit an all-time closing high of 2954.18 before nudging back at Friday’s close. And the S&P benchmark index has recorded a gain of 18% since January – its best six-month start to a year since 1997, leading to some technical market analysts speculating that it might reach between 3200 and 3300 over the next 12 to 24 months.
As a wave of global monetary easing cascades over the financial markets, sovereign bond yields are continuing to fall and the benchmark US 10-year Treasury bond yield has retreated to a low of 1.973%, dipping below the psychological 2% level for the first time since November 2016.
Astonishingly, negative-yielding bonds have jumped to a new record of US$12.5 trillion, setting another undesirable record for traditional fixed-income investors, such as pension funds and asset managers who depend on long-term income to cover their income liabilities.
This absence of meaningful income from safe-haven government bonds has forced global investors to embrace higher-risk strategies and consider much more complex portfolios in asset classes, such as alternative strategies, infrastructure, private equity and high-yielding equities and bonds.
This comes at a time when the markets for many of these asset classes are richly priced and could easily plummet on the back of any bad news. Also worth pointing out is that inflation and interest rates are likely to rise over the next decade, which will be devastating for long-dated bonds that currently have meagre fixed coupons.
The relationship between global entities and bond prices (which has existed since the start of this bull market in March 2009) has been distorted by central bank policies, as well as – to a lesser degree – disruptive technologies, and this has altered asset allocations. But going forward, global investors might need to be more mindful of the prospect of higher inflation and interest rates, which would lead to higher volatility and differing outcomes.
In the commodities markets, the price of US crude oil sky-rocketed by 9% over the week, notching up its biggest weekly gain since December 2016 (when it surged by more than 12%). Heightened tensions between Washington and Tehran spilled over into the energy markets when it was alleged that the US administration had considered military action against Tehran over the downing by the Iranians of a US military surveillance drone.
The US then reportedly launched a cyber-attack on Iran’s weapons systems on Thursday. However, there has been no independent confirmation of any damage to Iran’s systems. Following the incident, President Trump said that the US would impose “major additional sanctions” on Iran, but would leave the door open for further dialogue with Teheran.
Last week saw the price of gold bullion surge by around 4%, breaking the US$1400 per troy ounce barrier for the first time since 2013. In actual fact, the yellow metal enjoyed its biggest weekly gain since 2016, driven by geopolitical concerns between US and Iran, while the US dollar suffered its biggest weekly fall since 2018. The dollar was also trading at nearly its lowest level since March.
Closer to home, the Tory leadership battle continues: Boris Johnson and Jeremy Hunt are now the only remaining contenders, with the new party leader expected to be announced in the week beginning 22 July. Significantly, this week marks three years since the UK voted to leave the European Union.
As far as the UK’s domestic economy is concerned, the Bank of England has warned that the outlook is looking less positive. A number of important indicators – such as economic activity, employment, inflation and uncertainty – are all suggesting that trouble lies ahead. The new prime minister will need to address this, in addition to managing the Brexit outcome.
However, regarding the markets, the FTSE is currently more discounted than it has ever been in relation to the MSCI World Index. And as far as its value as an investment style is concerned, it has not been this cheap versus growth for more than 20 years. This means that a conclusion to the Brexit debacle – which would be good news for the UK economy – or a change in the asset allocator’s view regarding holding UK-sited assets could generate a significant bounce in the UK stock market.
Finally, although the financial markets rallied aggressively during the first half of the year, the second half may prove more contingent on the outcome of the trade talks at the G20 summit in Japan, future central bank policy, Brexit and the geopolitical risks involving the US and Iran. We therefore remain tactically optimistic over the coming weeks as momentum continues to move markets higher, but strategically more cautious as we move closer to 2020, since any unforeseen negative news will leave risk assets more vulnerable.
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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