Head of Equity Research
Market Update, Chris Beckett
Our team of equity analysts have spent the last few weeks poring over second quarter results looking for evidence to support an investment thesis, or of emerging trends that will affect the value of investments in the future. Whilst the majority of those updates have been positive, particularly in the USA for the higher quality companies that we tend to favour, they are not what have been driving equity markets.
Political and macroeconomic news has been far more important over the last week. The 25bps interest rate cut from the Federal Reserve was not enough to keep equity markets advancing but it is good to know that Jay Powell, the Chairman, is there ‘to sustain the expansion’ if we need him. However, his contradiction that it was just a ‘mid-cycle adjustment’ to policy implies that there isn’t much to worry about anyway.
Cynics have suggested that good stock market performance gives President Trump the confidence to ratchet up the rhetoric against China. The threat of tariffs and accusations of currency manipulation threaten the profitability and business models of many companies. A lowering of economic tensions would be mutually beneficial for both the USA and China but progress may have to wait until it suits the President’s re-election timetable.
Normally lower bond yields would improve the relative attractiveness of equities, but with heightened risks both internationally and domestically investors are sitting on the side-lines waiting for clarity on both economic and political fronts. We may have to endure a volatile news flow driven market over the summer before corporate fundamentals can re-establish market leadership.
Economic Update, Richard Carter
It has been an eventful few days on the macro front. The outlook for the global economy has taken a turn for the worse following Trump’s decision to extend the tariffs on China, supposedly due to the slow progress of negotiations. This has now been met by a strong response from the Chinese who have allowed their currency to weaken sharply and have moved to suspend imports of US agricultural goods; these are both areas that Mr Trump is very sensitive about.
These tit-for-tat, beggar-thy-neighbour measures are likely to drag on economic data and it was no surprise to see the US ISM manufacturing index weaken to a 3-year low last week. The Fed decided to respond by lowering interest rates by 0.25%, but they characterised the move as a mid-cycle cut rather than as the start of an extended easing cycle. This was a disappointment to markets partly because they are worried about the worsening economic outlook but also because they are hooked on cheap money, and who could blame them after years of central bank largesse? Following the latest trade developments, we have seen a big drop in global bond yields and interest rates markets expect at least another 0.5% of Fed cuts by year-end.
Sterling fell again last week as investors continued to fret about a no-deal Brexit. Boris Johnson saw his majority fall to 1 following the Lib Dem by-election victory in Wales, although the reality is more complicated as several non-Tory/DUP MPs may support the government in certain votes. The currency has fallen a long way and we are wary of a possible bounce if the news were to improve, but it is likely to be October before any side blinks, be that the government, Parliament or the EU.
Looking ahead this week, the main focus will be on trade but UK GDP numbers are released on Friday.
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.