Global Macro Environment

US Joining Global Growth Slow Down
The Institute of Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) fell further below 50 in the US indicating a contraction of manufacturing. However, the US economy is still hanging tough, due partly to manufacturing representing a smaller share of GDP than in most other economies, such as China and Germany. A key metric to monitor is non-manufacturing (i.e., services), which has largely been impervious to the trade tensions. The European consumer provided some positive data for the bloc as unemployment ticked down to 7.4%, a new cycle low, and retail sales increased approaching cycle highs. Similar to the US, consumption is key to economic activity, and the main driver of consumption is employment. However, possible tariffs from the US on EU goods should be monitored. Japan’s consumer confidence fell in September, a concerning result ahead of the VAT hike on October 1. These headwinds signal the likelihood of a difficult fourth quarter for the Japanese economy. In China, tensions with the US and Hong Kong remain as the Communist Party celebrates its 70-year anniversary. The manufacturing PMI for China continues to hover around the critical 50 mark.

Fed Cuts: Not If, But How Many?
After the September fed funds rate cut of 25bps, officials were split over the outlook moving forward. Opposing data in early October (weak manufacturing data versus strong employment data) will test the group’s data-driven thinking. As of this writing, bond investors are pricing in a 75% probability of a rate cut in late October.

Geopolitical Risks
The U.K.’s top court ruled that Prime Minister Boris Johnson acted unlawfully when he suspended Parliament for five weeks, opening the door to new challenges to his Brexit strategy. The Supreme Court said the prime minister misused his authority to advise Queen Elizabeth II to suspend Parliament from September 9 through October 14. Johnson most likely will not be able to call an election before the October 31 deadline to leave the EU, and therefore another delay is the most probable outcome.

US and China tensions appear to have decreased over the last month, though the situation remains fluid. President Donald Trump again postponed some tariff increases, and China has agreed to buy agriculture goods, specifically soybeans and pork. China’s stall strategy to wait out President Trump in hopes for someone more amicable, like Joe Biden, took a hit as Elizabeth Warren’s recent surge in the polls has her as the frontrunner for the Democratic nomination. For all of the differences between President Trump and most of the Democratic nominee candidates, a protectionist stance on trade with China is one that both the President and Warren share. For China, trying to work out a trade deal with the “devil you know” as opposed to the “devil you do not know” may seem like a better path.

Market Observations

US Equities
Equities rebounded in September led by value stocks, which returned 3.6% relative to growth at 0.0% for large cap companies and 5.1% relative to -0.8% for small cap companies. At the end of the third quarter the broad market posted its best performance in the first three quarters of the year since 1997. However, analysts are forecasting a negative earnings period for the S&P 500 in the third quarter. Year-over-year earnings growth in the first two quarters came in slightly positive. Companies reporting early results in the technology and financial sectors, the two biggest sectors in terms of earnings contribution, should give investors a preview into whether those forecasts will be accurate.

International Equities
International economies tend to be more trade dependent and thus are more sensitive to global economic momentum. As a result, slowing global growth will continue to remain the biggest risk for equities in this region. Through September 30, 2019, developed international markets returned 12.8%, behind both US large and small cap equities (20.6% and 14.2%), and emerging markets lagged even further at 5.9%.

Fixed Income
The brief spike in the Secured Overnight Financing Rate (SOFR) above 5% last month grabbed investors’ attention. The Fed scheduled offerings of at least $75B in market repurchase agreements, or repos, beginning September 23 through October 10. As the Fed increases the size of its balance sheet, this will lead to higher excess reserves, thus easing global liquidity conditions. Falling yields this year have provided a nice return for bonds, the Bloomberg Barclays Agg is up 8.5% through the third quarter.

Real Assets
The Saudi Arabia drone strike last month was the largest oil supply disruption in history, wiping out 5% of global oil production instantly. Prices surged following the attack to almost $70 per barrel but have since fallen back under $60 per barrel. Tensions will remain elevated with Iran, after the US, Britain, France and Germany all concluded that Iran was behind the attack, likely keeping oil price volatility high.

This Financial Landscape represents the consensus of the Oxford Investment Fellows as of 10.11.19 and is subject to change at any time due to market or economic conditions or other factors. Statistical data is derived from third party sources believed to be reliable and has not been independently verified by Oxford. The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.