MARKET COMMENTARY – AUGUST 2019

After a very strong first half of 2019, financial markets lost some momentum during July and early August as trade tensions between the US and China resurfaced.  To counter the risk of slowdown the Federal Reserve (Fed) lowered US interest rates for the first time since 2008 at their meeting on 31 July, and the European Central Bank (ECB) gave strong signals that a further stimulus package is imminent.

The US has been the leading developed equity market and the S&P 500 index reached an all-time high in July, returning +24.50% for the year to 31 July.  The initial reaction in stock markets to the Fed’s rate cut suggested that investors were expecting signs of a more concerted cycle of rate cuts. US economic growth is slowing, however with jobs data relatively positive and steady domestic inflation, the consensus is that more aggressive action by the Fed is unnecessary at this stage.

After the G20 summit in Japan, hopes had been raised of US/China trade negotiations producing constructive results. President Trump’s recent announcement of another round of tariffs on c. $300 billion of Chinese goods not previously targeted and taking effect from September did however surprise markets, causing a significant pullback amidst concerns over the impact on global growth.

In the UK, following Boris Johnson’s success in the Conservative party leadership contest and appointment as Prime Minister, markets became increasingly concerned of the possibility of a “no deal” Brexit. In response, the pound fell against the dollar to levels not seen since 2017.  Sterling provides a broad indicator of the progress of the Brexit negotiations and the currency fell 3.94% against the US dollar over July.  There was also weakness against the euro with a decline of 1.83%.  The Prime Minister is hoping that the threat of “no deal” will significantly strengthen his position in the ongoing negotiations.  The current parliament has though shown that it is unlikely to be willing to allow the UK to leave the EU without a deal – unless a general election or second referendum takes place that provides a strong mandate for action.  The Bank of England Monetary Policy Committee (MPC) meeting on 31 July voted unanimously to maintain the Bank Base Rate at 0.75% and to maintain the stock of UK government and corporate bond purchases at £435bn.

In recent months, emerging markets have been impacted by weaker Chinese economic growth given the reliance of some economies on Chinese imports. Trade tensions have also been a concern but with growth stabilising in China and policy stimulus being provided pressures have been eased.  Together with a weakening dollar and in light of the current and anticipated interest rate decreases, conditions may become more favourable.

In Europe politics have been at the forefront of investor concerns.  One of the most important developments from the nomination of many of the important posts in the EU was the nomination of the former International Monetary Fund (IMF) managing director Christine Lagarde to serve as the next ECB chief.  Given the difficulty the ECB faces in normalising monetary policy in the current economic cycle, the view is that the response to the next downturn will require better cooperation between policymakers and central bankers; Lagarde’s political experience has therefore bolstered her case against other more conventional candidates.  The ECB meeting in July sent positive signals to the market, indicating that a further stimulus package is coming, with the possibility of negative rates and an extended round of asset purchases.  In spite of encouraging political progress, including the constructive talks regarding Italian fiscal affairs, economic data in the eurozone remains mixed.

Central bank policy has been supportive of all assets year to date and this looks set to continue for the remainder of 2019 although asset prices may already now reflect this support unless the stimulus is more extensive than anticipated.  The US/China trade dispute is likely to continue to weigh on markets in the absence of progress from negotiations and investors will be looking for evidence of any impact on corporate earnings.  A diversified approach to managing portfolios remains important with areas such as companies with strong balance sheets less sensitive to slowing growth, government bonds which may see further gains if interest rate policy remains loose, and non-equity assets such as infrastructure all likely to prove valuable.

Performance to 2 August 2019

*July 2019