MARKET COMMENTARY – JULY 2019

The accommodative monetary policy adopted by central banks, potential recovery in Chinese economic expansion and softer rhetoric regarding the US-China trade negotiations have been among the factors supporting markets in the first half of 2019. The outlook changed somewhat in May, with the weakness in stock markets being triggered by the announcement that the US would be increasing tariffs on US imports from China. However, a commitment at the G20 summit, from Presidents Trump and Xi Jinping, to continue the negotiations and not impose further tariffs at this stage helped to push markets higher, with the US reaching new record highs recently.  Closer to home, the Prime Minister Theresa May’s resignation and developments in the Conservative Party leadership contest have been interpreted by the market as increasing the likelihood of a “no deal” Brexit, possibility of a general election and/or a second referendum.

The S&P 500 (US) has been the strongest major developed market in 2019, in spite of the uncertainty surrounding US-China trade.  The introduction of further tariffs has the potential to impact the US economy as well as China by hindering growth and increasing inflationary pressures. The concern is that this could result in reduced capital expenditure, job losses and consequently a reduction in consumer confidence. Consumers remain the main drivers of GDP, supported by strong employment figures and wage growth.  The focus on the labour market and consumer outlook has likely been the reason for the change in rhetoric from the Federal Open Market Committee (FOMC) and the market now expects 0.50% of rate cuts by the end of this year. US 10-year government bond yields have fallen to about 2% in response and while the 10-year economic expansion seen so far is losing pace, the consensus view is that there is no immediate risk of recession. The S&P 500 produced a +22.03% total return in local currency terms year-to-date (to 4 July 2019).

Brexit negotiations continue to dominate headlines in the UK. The Prime Minister’s resignation is not expected to make any material difference to the state of the negotiations and has been deemed by the market as increasing the likelihood of a “no deal” Brexit scenario.  Parliament is still expected to prevent a ‘no deal’ Brexit however, unless a general election or second referendum takes place and provides a strong mandate for such an outcome.  Should this be the case, a disorderly exit could result in a sharp fall in sterling and short-term rise in prices, creating more challenging conditions for the consumer.   Sterling continues to act as a barometer for the developments and rose 0.53% against the dollar over June.  With the uncertainties surrounding Brexit, consumer confidence and mixed economic data, the Bank of England Monetary Policy Committee opted not to increase interest rates at their meeting of 20 June 2019.

In 2018 emerging market equities were weighed down by fears of a slowdown in the pace of Chinese economic growth given a number of developing markets’ reliance on Chinese imports.  The vulnerability of some economies to the potential impact of global trade tensions and higher oil prices is a headwind, particularly for net oil importers such as Argentina and Turkey. Conversely, this has been a positive for net exporters such as Mexico.  Developing economies reliant on external funding find tightening US monetary policy challenging; consequently, the market expectation that there will be rate reductions in 2019 has been a notable positive.  These markets continue to be sensitive to a number of factors, including a slowdown in global growth.

Economic data in the Eurozone has been mixed and growth expectations continue to be influenced by the region’s exposure to China and sensitivity to trade uncertainty. Encouraging signs have been shown by the EU labour market year to date, the majority of member states have seen a notable decline in unemployment and higher spending which should support growth moving forward. There are though concerns over the implications of weaker consumer confidence, as in the US.  The US’ postponement of the discussion regarding global auto tariffs has been a positive and the results of the European election were supportive for the EU project, with populist parties underperforming expectations. The European Central Bank (ECB) has stated that there is further scope for looser monetary policy should the economy not improve, assuring the market that there are plenty of resources left to provide further support should this be required.

Performance to 4 July 2019

*June 2019