Monday 1st July 2019
It is sometimes said that equity investors look for opportunities, whereas bond investors look for problems. While perhaps a simplified statement, it is clear that markets currently present a curiously two-sided picture: on the one hand, equity markets remain in rally territory, whereas the optimism is far from shared by bond investors.
The optimism at large on equity markets comes in spite of the S&P 500 and FTSE 100 ending last week marginally lower. This continued buoyancy reflects, in part, positive corporate earnings, continued hopes that a US-China trade deal will be agreed, and growing confidence that central banks are in full support of the market – via potential rate cuts and perhaps even more quantitative easing (QE).
That said, the Fed’s recent dovishness has not satisfied the growth-hungry US President, who last week described Fed policy as “insane” and claimed that the Chair, Jerome Powell, is doing a “bad job”. Trump argued in favour of ECB Governor Mario Draghi running the show – presumably because he’s recently shown inclination to offer even more support to the market than the Fed.
…versus fear on bond markets
Bond investors, however, have a different story to tell. Worries have shown up in the recent slide in bond yields – and especially in the yield on the 10-year US Treasury, which last week dipped below 2% for the first time since 2016. (Investors tend to buy up Treasuries, thereby pushing down yields, when they are worried about the global economy and running for safety.)
Yet this ‘equity optimism vs bond fear’ conundrum may be best explained by the machinations of central banks. It is precisely the worries of central banks that are leading them to consider rate cuts and further market support. Yet for equity investors, the promise of extra support for the market via QE, and extra support for businesses via lower interest rates, provides hope that growth can continue.
Geopolitics and trade issues seen on markets
Despite the puzzle regarding central banks, there was continued focus last week on geopolitics and trade, and inevitably it spilled over onto markets. The White House imposed additional sanctions on Iranian officials, including Ayatollah Ali Khamenei to prevent them accessing ‘financial instruments’. Gold and Treasuries rallied in response, before Iranian officials hit back and said Khamenei has no foreign bank accounts to curb. This might have presented a still more tense backdrop for the G20 meeting in Osaka over the weekend. In reality, however, China-US trade relations was the biggest show in town…
G20 focused on US-China relations
For all the nations represented, the G20 was probably more about the ‘G2’ of the US and China than anything else. The White House provided hints in the run-up to the meeting that a deal was likely to be struck before long. Steven Mnuchin, US Treasury Secretary, said a US-China deal was 90% of the way to completion. His comments pushed up stocks, even as some weak US economic data hinted at slowing growth.
News that President Trump and President Xi had reached an agreement to resume trade talks was greeted positively by markets in early trading, albeit potentially providing only short-term relief. Trump also reversed a ban on American companies selling to China’s Huawei and announced that the US would not ramp up tariffs on Chinese goods “for the time being”.
Chris Ralph, Chief Investment Officer of St. James’s Place, commented: “This certainly doesn’t mean the trade war is over as there is still much for the two sides to agree on. That they are talking again is a positive, but I think a deal is more likely only as we head towards the 2020 US elections.”
UK suffers from a lack of investor confidence
Meanwhile, in the UK, data last week showed that foreign investment in the UK fell by 14% in the fiscal year to March 2019 – its lowest in six years and a second consecutive annual fall. Investment in Central London offices, meanwhile, fell by more than a third in the first half of this year, according to Cushman & Wakefield. Last week PSA, the car manufacturer, committed to making its next Vauxhall and Opel Astra cars in the UK only if a no-deal Brexit is avoided.
Boris Johnson, the bookies’ favourite to succeed Theresa May next month, has offered conflicting signals over the possibility of a no-deal outcome in hustings last week, saying, on the one hand, that he will ensure the UK leaves the EU by 31 October and, on the other, that the odds on a no-deal outcome are ‘a million to one against’. If the bookies are right, he will soon have the chance to fulfil his predictions…