Chief Investment Strategist
Market Update, Alan McIntosh
Last week was quite an extraordinary one, even for markets which rarely cease to surprise. Government bond yields hit an all-time low (at least in Europe) while the US stock market climbed to a fresh all-time high. Gold, which is meant to be a hedge against inflation and risk generally, rose to a six-year peak, despite inflation expectations falling and risk assets going up in value. All makes sense? I thought so.
Financial markets remain dysfunctional, with a record $12 trillion of global bonds offering a negative yield. Even France, with public debt at 100% of GDP, saw its 10 year government bond yields fall below zero last week. Of course if the US Fed cuts interest rates next month, as the market expects it to, bond yields are likely to remain low in the absence of inflationary pressures and in a slowing economic environment. Having raised interest rates nine times since the end of 2015, the Fed is in a position to shave borrowing costs, but other major countries have less flexibility. The bizarre thing is that the global economy is still delivering reasonable growth and a successful resolution to the US / China trade conflict would reduce economic risks further.
So where does that leave equity markets? Poised at or around all-time highs, global shares are reflecting the view that lower interest rates are good for business and that economic recession does not lurk around the corner. Household incomes have been rising and with inflation moderating, consumers can see their spending go a little further. Stock markets have gone roughly sideways for the last twelve months, but company earnings have grown, leaving typical market valuations looking reasonable compared with history. Equity markets tend to look at the world with a glass half full, while bond markets often contemplate with a glass half empty. As ever, stay diversified, but stay invested.
Economic Update, Richard Carter
The focus this week should be on the G20 summit in Japan which starts on Friday, and especially the expected meeting between President Xi and President Trump. Probably the best we can hope for is that the two sides agree to continue negotiating to resolve the trade dispute because a comprehensive deal looks a way off. Any breakdown in talks could lead to tariffs on another $300bn of Chinese goods and a further hit to the global economic outlook.
Bond yields continued to fall last week thanks mainly to increasingly dovish central banks. The Federal Reserve seems likely to cut interest rates at their next meeting in July with some analysts forecasting a shock and awe reduction of 50bps. The ECB also sounds ready to ease policy as inflation remains too low for comfort, while the Bank of England dropped the pretence that rate hikes could be needed soon.
On the data front, there was little of note last week other than an improvement in the Eurozone PMIs, but German manufacturing is still stuck in the doldrums thanks to the slowdown in global trade. US durable goods orders are out this week while the situation in Iran continues to look hazardous.
On the political front, Boris Johnson’s support amongst the Tory membership has probably slipped after an eventful few days but he remains the clear favourite. However, Johnson is making promises that he is going to struggle to keep regarding Brexit and could lose a vote of no confidence should he opt for no deal. His majority in Parliament is going to be wafer thin so the UK is still seemingly headed for a major political crisis in the autumn.
Investors should remember that the value of investments, and the income from them, can go down as well as up. You may not recover what you invest. This commentary has been produced for information purposes only and isn’t intended to constitute financial advice; investments referred to may not be suitable for all recipients. Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.