Global Macro Environment

Global Growth Slowing
Global economies appear to be approaching stall speed. The Purchasing Managers Index contracted in the Eurozone for the fifth 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. Economic growth in the US remains resilient by comparison. The Atlanta Fed’s GDP model suggested a solid increase in domestic demand in Q2, implying steady underlying growth within the US economy. The US consumer remains in great shape and is responsible for a vast majority of GDP growth.

Fed Cuts: Not If, But How Many?
Despite the strong June jobs report, market expectations still point towards multiple rate cuts in 2019, with near certainty of a cut in the fed funds rate after the July Fed meeting. Chairman Powell did little to push back against market expectations this year during his June press conference indicating that multiple cuts are on the table. How quickly has the landscape changed? In March not a single Federal Open Market Committee member expected rates to fall this year. In June eight members penciled in rate cuts, seven of whom say they expect 50bps of easing for the remainder of 2019.

Geopolitical Risks
President Trump and President Xi Jinping met at the G-20 Summit in Tokyo and the dark period of trade talks seems to have passed. However, a quick resolution can’t be expected yet. Both sides are starting to feel the economic pain of the trade escalation that began on May 5. This was enough to stall new tariffs from coming into effect and motivate negotiators back together. The most significant news was China’s Huawei, the largest telecommunications-equipment manufacturer in the world, regaining access to US suppliers in exchange for the US getting agricultural purchases. Currently, most of the specifics of a trade deal look to be complete, however, debates like intellectual property requirements and repeal of existing tariffs remain sticking points to getting over the finish line.

Tensions between the US and Iran have escalated and sent oil prices higher. Two oil tankers were damaged off the coast of Iran, with government officials pointing at Iran as the culprit. As a result, President Trump announced new sanctions on Iran, targeting Supreme Leader Ayatollah Ali Khamenei, his office and persons appointed by the Supreme Leader. In recent days Iran said it would begin enriching uranium beyond the 3.67% limit set in the 2015 nuclear deal, raising pressure on Europe, China and Russia to provide relief from the crippling US sanctions.

Market Observations

US Equities
Equity markets bounced back from declines in May and rallied in June as the probability of the Fed cutting rates increased and renewed US – China trade hopes developed. The S&P 500 reached all-time highs throughout the month and returned +7.1%. The index also posted the best first half of a calendar year since 1997. All sectors are positive with information technology, consumer discretionary and industrials leading the way.

International Equities
The dovish tone from global central banks positively impacted investor sentiment and supported asset prices overseas. Both international developed and emerging market equities have recovered from the Q4 2018 drawdown that bottomed near the end of last year. Developed and emerging market returns for the first half of 2019 are 14% and 11%, respectively.

Fixed Income
The US 10-year Treasury yield dipped below 2.0% for the first time since 2016. In Europe, France was the latest country to see their 10-year yield fall into negative territory. It’s historically rare to see, but total fixed income ETF flows outpaced total equity ETF flows in the first half of 2019.

Real Assets
OPEC agreed to extend production cuts of 1.2mm b/d into 1Q20 at their meeting in Vienna. The cuts mean that supply growth will remain constrained as we enter the peak summer demand season. The Mid-East tensions between the US and Iran should keep oil volatility high as worries over global demand and growth expectations persist. Additionally, tensions are disturbing the global supply side. One big concern is the Persian Gulf, which accounts for approximately 20% of global output. In precious metals, the three main drivers of gold demand (portfolio diversification, inflation hedge and safe-haven asset) could continue to sustain the recent price rally. Midstream energy (including MLPs) and global real estate continue to deliver strong relative performance.

This Financial Landscape represents the consensus of the Oxford Investment Fellows as of 7.11.19.
Statistical data is derived from third party sources believed to be reliable and has not been independently verified by Oxford.
The above commentary represents the opinions of the author as of 7.11.19 and are 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.