What is Moving Markets?
David Beaton
David Beaton
Chief Investment Officer

When making your investment decisions, there are a lot of factors to be taken into account. Investing is about so much more than just shares or equities and can include bonds, currencies and commodities. Asset allocation should be part of every investment strategy and aims to balance risk and reward by adjusting the percentage of each asset in your portfolio.

Here we take a look at what is currently driving markets as a precursor to more detailed views on each asset class which are available in our August Investment Journal.

Despite the ongoing uncertainties caused by global trade issues and central bank monetary policy, markets performed well in July with the release of strong US and European industrial and services data, along with strong US GDP data, all of which has supported investor sentiment. Equally, markets found solace in the ongoing second-quarter earnings season. The reporting season in both the US and Europe has been in-line if not better than expected which has supported equity markets amidst the increased White House rhetoric on trade.

Risk assets in particular have shown resilience as a result of positive economic and earnings dynamics. This however should not propagate investor complacency. Investors should be acutely aware of the potential challenges and risks that remain as we move into the second-half of the year.

While the issue of trade continues to rumble on, the unpredictable nature of President Trump’s comments, such as potentially applying tariffs on all US imports from China ($500bn worth of goods), will result in possible market-moving headlines.

A new risk for markets over the coming months is a potential currency war which historically has accompanied any trade hostilities. This has been highlighted by Trump’s comments about recent weakness in the Chinese yuan with the implicit suggestion that this is a deliberate policy by the Chinese to offset the impact of tariffs.

Further fuelling currency related uncertainty were his comments on current Federal Reserve monetary policy and the fact that interest rate increases were unnecessary as they only served to strengthen the US dollar thus reducing US competitiveness.

The second area of continued risk for global financial markets is central bank monetary policy.

While the US Federal Reserve has increased interest rates 7 times since it concluded Quantitative Easing (QE) in October 2014 and two more rate hikes are possible in the second-half of 2018, the ECB has signalled its intention to conclude its own QE programme by year-end while unconfirmed reports suggest that the Bank of Japan is looking to tweak its asset purchase programme.

While the pace of policy normalisation by global central banks will continue to be gradual, the era of unconventional policy accommodation is coming to an end thereby leading to a threat of tighter credit conditions. This has resulted in a move higher in global bond yields, particularly in the US. While this needs to be monitored, we do not see it as an immediate threat to risk assets.

What is significant however about this recent move higher in yields in that short-dated US paper i.e. 3 Month Treasury Bills and US 2-Year Treasuries, with yields of 2% and 2.64% respectively, now return more than the yield available for the S&P 500 Index (1.85%). This relative yield differential will focus attention amongst investors on the risk free return of short-dated paper relative to equities.

The focus for the month ahead will continue to be on the second-quarter earnings season as well as ongoing trade rhetoric. As August is traditionally a quiet month for markets with lower trading volumes, the potential for headline driven volatility remains high.

Apart from earnings and trade, focus continues to be on global central banks. The US Federal Reserve met at the start of the month and left rates unchanged while the Bank of England also met and increased rates from 0.50% to 0.75% despite ongoing Brexit uncertainty and mixed economic data, particularly on the inflation front.

Supported by continued strong economic data and ongoing positive earnings we remain positive on the outlook for markets in the coming months but highlight the need for a balanced equity sector spread and selective bond exposure to protect against ongoing periods of market volatility.

Further detail regarding the impact on equities, bonds, currencies and commodities can be found in our August Investment Journal. To speak with a Portfolio Manager or Account Executive today, please phone the Cantor Fitzgerald dealing desk on 01 633 3633.

 

Warning: Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up.