Global Macro Environment
Global Growth Slowing
Global economies appear to be approaching stall speed. The Purchasing Managers Index contracted in the Eurozone for the sixth consecutive month, China’s economy seems to be fading from the tariff impact and the UK is experiencing fragile domestic demand due to the uncertainty around Brexit. Given this backdrop, the European Central Bank signaled it is prepared to cut short-term rates for the first time since early 2016. Economic growth in the US remains resilient by comparison. The second quarter grew at a healthy clip (2.1% annual rate) as higher consumer spending offset a decline in business investment. Non-manufacturing is still providing good support versus manufacturing and the US consumer story continues to be responsible for the vast majority of GDP growth.
Fed Cuts: Not If, But How Many?
The Fed delivered the first interest rate cut since 2008 at their July meeting in a proactive strike to cushion the economy from a global slowdown and escalating trade tensions. Officials also announced they would end the runoff of their $3.8 trillion asset portfolio two months earlier than previously expected. Chairman Powell signaled this was a mid-cycle policy adjustment, but the bond market is currently pricing in multiple cuts for the rest of 2019.
The end of July and beginning of August brought renewed escalation to the trade war. Tedious progress in negotiations seemed to be a new tactic from Beijing, which increasingly thinks waiting may produce a more favorable agreement. Chinese experts have said that Beijing wants to appear willing to negotiate, but thinks they can extract better terms by not hurrying into concessions. President Trump, sensing this, said the US would impose 10% on an additional $300B in Chinese goods and products beginning September 1, after trade talks failed to yield any significant results. The resulting tariffs have officially cost China its position as the top trading partner of the US, as exports and imports between the two largest economies continue to fall sharply. China’s retaliation came in the form of currency depreciation, as it allowed the Yuan to fall and breach the psychological ceiling of 7.0 USD/CNY, leading the US to label China a currency manipulator for the first time since 1994.
Boris Johnson, the former foreign secretary and mayor of London who has pledged to take the UK out of the EU on October 31, was elected as the next British prime minister succeeding Theresa May after winning the leadership of the ruling Conservative Party. His term will almost certainly be defined by Brexit, arguably the greatest political challenge faced by any British prime minister since World War II.
July was a positive month for US equity markets. A flight to safety by investors worried about global growth, America’s trade war with China and now currency battle caused equities to fall in the early days of August. The consensus around second quarter growth in earnings per share has officially turned positive. The healthcare sector led the way with surprised earnings and growth. Healthcare companies in the S&P 500 saw 95% of reported earnings come in above estimates.
International and emerging markets equities did not keep pace with US equities in July as both were slightly negative for the month. Given the tight trade relationship between China and developed international and emerging markets economies, additional stimulus implemented by China to prop up their domestic economy could be beneficial.
The US 10-year Treasury ended the month at 2.0%. Since then, a flight to safety has resulted in yields falling dramatically. The current US 10-year Treasury yield sits at 1.7% as of date of writing. US credit indicators, specifically BBB spreads, look contained for now. Globally, negative yielding debt continues to rise and is nearing $14T in market value. The entire German government bond curve is in negative territory.
Global oil prices slid into a bear market. Brent crude has fallen more than 20% from an April high amid fresh concerns that the US-China trade war will hurt the global economy and curb fuel consumption. These concerns are in addition to the Middle East tensions between the US and Iran which may continue to keep oil volatility high as worries over global demand and growth expectations persist. In precious metals, the three main drivers of gold demand (portfolio diversification, inflation hedge and safe-haven assets) are currently buoying the recent price rally.
This Financial Landscape represents the consensus of the Oxford Investment Fellows as of 8.19.19 and is subject to change at any time due to market or economic conditions or other factors. The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice. Statistical data is derived from third party sources believed to be reliable and has not been independently verified by Oxford.