Equity markets made further progress last week, boosted by positive headlines from trade negotiations, as well as ongoing hopes for central bank policy easing over the second half of the year. Government bond yields fell even further to record lows across Europe, and towards their post-crisis lows in the UK and the US, as the Bank of England appeared to jump on the dovish bandwagon.
While the G20 summit in Japan did not generate significant headlines, a meeting between President Trump and President Xi resulted in a truce being declared, with both sides agreeing to restart trade talks. Markets responded positively to the news but the lack of substance to the agreement suggests that markets will continue to focus on the short-term political noise and react accordingly, Elsewhere, the US turned its attention on Europe, threatening to impose tariffs on imports worth up to $4bn, due to aircraft subsidies following a long term dispute.
Globally the manufacturing index fell to the lowest level since 2012 in June, with sharp falls in new orders and business optimism at the lowest level on record. At a regional level, the data for the US continues to hold up better than elsewhere particularly as the recent job numbers were relatively strong reducing the case for an interest rate cut in July. It remains the case that bad news is good news in that slowing data equates to looser central bank policy.
In the UK, the service sector narrowly avoided stagnation in June, while the construction industry slumped to its worst monthly performance in more than ten years. UK manufacturers also recorded the sharpest drop in factory orders for more than six years.
In Europe, there was momentum within the Italian bond market as concerns over a clash with the EU over budget deficits were finally put to rest as Italy agreed to cut their 2019 deficit to 2.04 per cent from 2.4 per cent, a reduction of €7.6bn. News also broke that the current IMF head Christine Lagarde was proposed as the new head of the European Central Bank, replacing Mario Draghi. Lagarde’s nomination was welcomed as her views as head of the IMF have been closely aligned with those of Mario Draghi, and thus a continuity of policy is seen as likely.
One of the fundamental questions for markets in the second half, is whether the US economy, and probably therefore the global economy, experiences a reflationary period or moves towards a recession. There are many unknowns and the trade war is the wildcard in this and even though there has been some de-escalation of tensions between the US and China last week, relations on this topic remain fragile.
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