Market Insights – JUNE 2019

 
Christopher Peel discusses what’s coming next in global financial markets in a recent interview on CNBC. Read his notes below:

Market Views

The dovish pivots by the PBOC, ECB and US Federal Reserve represent a return to the Goldilocks scenario in which both bond and equity markets rally. Low inflation and low inflation expectations will underpin bond yields for the near-term. Equity markets have recovered from their 4th quarter losses and the bull market has further to run. A successful conclusion to the US-China trade negotiations will fuel another leg up. Focus will then return to company earnings and the weakening US dollar. Positions: Overweight bonds (duration), high yield, EM debt (local), DM & EM equities. Underweight: US dollar

Market Views

The dovish pivots by the PBOC, ECB and US Federal Reserve represent a return to the Goldilocks scenario in which both bond and equity markets rally. Low inflation and low inflation expectations will underpin bond yields for the near-term. Equity markets have recovered from their 4th quarter losses and the bull market has further to run. A successful conclusion to the US-China trade negotiations will fuel another leg up. Focus will then return to company earnings and the weakening US dollar. Positions: Overweight bonds (duration), high yield, EM debt (local), DM & EM equities. Underweight: US dollar

Monetary Policy

I expect that Fed Chair Jerome Powell will cut short-term interest rates at the next meeting by at least 25bps. Recent economic data has been mixed (weak PMIs and strong payroll numbers), but it’s clear the pressure from the White House has altered the committee’s thinking. In Europe, the BOE is on hold until a Brexit game plan has been agreed by the new Prime Minister and Parliament. The ECB is running out of cards to play and is increasingly at the mercy of the global economy. Draghi will likely oversee at least one more rate cut before retiring later in the year. The PBOC will continue to be accommodating by injecting cheap money into their domestic economy as part of the wider Belt and Road initiative.

Risk Environment

The investment environment remains favourable for risk assets, especially in the emerging markets. Too much attention has been placed on the US-China trade negotiations and not enough on the other trade deals that have been reached such as the Trans-Pacific Partnership Agreement (TPP), the United-States-Mexico-Canada Agreement (USMCA) and the EU-Japan Trade Agreement. Global trade volumes have slowed over the last year, but these deals will lead to an increase in global trade in the future. Government debt will remain supported by lower short-term rates, a return to QE and benign inflation. Eventually these policies will inflate the bond bubble to even greater heights. Kicking the can down the road for longer will have material and negative consequences for future debt investors.

Monetary Policy

I expect that Fed Chair Jerome Powell will cut short-term interest rates at the next meeting by at least 25bps. Recent economic data has been mixed (weak PMIs and strong payroll numbers), but it’s clear the pressure from the White House has altered the committee’s thinking. In Europe, the BOE is on hold until a Brexit game plan has been agreed by the new Prime Minister and Parliament. The ECB is running out of cards to play and is increasingly at the mercy of the global economy. Draghi will likely oversee at least one more rate cut before retiring later in the year. The PBOC will continue to be accommodating by injecting cheap money into their domestic economy as part of the wider Belt and Road initiative.

Risk Environment

The investment environment remains favourable for risk assets, especially in the emerging markets. Too much attention has been placed on the US-China trade negotiations and not enough on the other trade deals that have been reached such as the Trans-Pacific Partnership Agreement (TPP), the United-States-Mexico-Canada Agreement (USMCA) and the EU-Japan Trade Agreement. Global trade volumes have slowed over the last year, but these deals will lead to an increase in global trade in the future. Government debt will remain supported by lower short-term rates, a return to QE and benign inflation. Eventually these policies will inflate the bond bubble to even greater heights. Kicking the can down the road for longer will have material and negative consequences for future debt investors.

Brexit

The chances of a hard Brexit have risen with the resignation of Theresa May. This is largely priced into sterling, but the real danger for investors is the possibility of a Labour government under Jeremy Corbyn. Boris Johnson is the front runner for 10 Downing street, but the leadership contest is far from over. The 15 remaining hustings will likely narrow Johnson’s lead and Jeremy Hunt will prove to be a worthy adversary. The Conservative Party cannot afford another mistake and must reassert its authority over the Brexit process. The odds of an early general election remain low, especially given that the Tories and DUP would likely be voted out of office due to voter apathy.

Brexit

The chances of a hard Brexit have risen with the resignation of Theresa May. This is largely priced into sterling, but the real danger for investors is the possibility of a Labour government under Jeremy Corbyn. Boris Johnson is the front runner for 10 Downing street, but the leadership contest is far from over. The 15 remaining hustings will likely narrow Johnson’s lead and Jeremy Hunt will prove to be a worthy adversary. The Conservative Party cannot afford another mistake and must reassert its authority over the Brexit process. The odds of an early general election remain low, especially given that the Tories and DUP would likely be voted out of office due to voter apathy.

G20

The outcome of the G20 Summit in Osaka could very well set the tone for markets during the summer months. The success or failure of the meetings will largely be driven by the outcome of the meeting between Presidents Donald Trump and Xi Jinping. Both men need to walk away with a trade deal whilst saving face. Forward progress is likely, but the final deal is still probably several months away.

G20

The outcome of the G20 Summit in Osaka could very well set the tone for markets during the summer months. The success or failure of the meetings will largely be driven by the outcome of the meeting between Presidents Donald Trump and Xi Jinping. Both men need to walk away with a trade deal whilst saving face. Forward progress is likely, but the final deal is still probably several months away.
This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Tavistock Wealth Limited. Date of data: 26th June 2019 unless otherwise stated.

Want to know more about the Equity Markets?

Please contact us here:

5 + 4 =

Recent blogs
Reflections

Reflections

This is the first blog since the holiday break. Whilst travel restrictions meant it wasn’t the holiday that had been planned, we adapted, and enjoyed the opportunity to spend some time together as a family and reflect on the last few months.

read more
Is the Bond Market Smarter than the Stock Market?

Is the Bond Market Smarter than the Stock Market?

Following on from last week’s blog, the dramatic rotation from growth to value remains in place for now. Early signs of quick snapback into the prior channel have not yet materialised and instead the ratio has consolidated and even shown signs of moving.

read more
Anatomy of an Election (So far…)

Anatomy of an Election (So far…)

The narrative, heading into the US election, was a ‘Blue Wave’ victory for the Democrats. Polls and betting odds favoured a Biden win and a Senate majority and investors positioned accordingly.

read more
Since the Market Low

Since the Market Low

The ACUMEN Portfolios continued their strong run throughout October, largely outperforming the market composite benchmark and IA sectors (used for peer group comparison purposes) which lost ground across the board.

read more
Canary in the Vol-Mine

Canary in the Vol-Mine

With the US election just 8 days away, financial markets are following the polls and pricing in a Biden win. The prospect for a Democratic clean sweep has contributed to the rising ‘Blue Wave’ narrative benefiting those companies that stand to benefit from Democratic party policy. 

read more
Further For Longer

Further For Longer

On Tuesday Fed Chairman, Jerome Powell, made a speech at the National Association for Business Economics, during which he implied the government should err on the side of caution and provide too much stimulus rather than too little. 

read more
Smart Beta Unwrapped

Smart Beta Unwrapped

Our Chief Investment Officer, John Leiper, was recently invited to provide his valuable insights as part of ETF Stream’s video conference livestream: “Beyond Beta Europe Digital: Smart beta unwrapped”.

read more