Global Macro Environment

Cloudy Global Economic Outlook
US GDP increased at an annual rate of 3.1% in the first quarter. Healthy spending, accelerating wages and a strong labor market all indicate the US consumer remains in good shape. Outside the US, the Chinese economy has yet to gain traction. The strong March PMI reading was short lived as April saw the measure fall back near the 50 boom/bust line. This doesn’t help Europe and emerging markets as both are significant trading partners. Tariff increases between the US and China cast a cloudy outlook on the global economy looking forward as global trade represents 25% of global GDP. It doesn’t appear the trade war narrative will be resolved anytime soon.

Fed Vigilant
At the end of May futures markets were pricing in rate cuts over the next 12 months (54bps) and 24 months (64bps). The most recent Federal Open Market Committee (FOMC) meeting minutes signaled that US monetary policy is appropriate and members pointed to solid economic growth, strong labor market and muted inflation pressures. However, they have since signaled their willingness to cut rates should the Trade War have a further negative impact on the economy.

Geopolitical Risks
Recently, China released a government white paper blaming the US for the breakdown in trade talks and demanded that all existing tariffs must be removed for any deal to be signed. The US responded that China was at fault for the breakdown in talks which suggests that the two sides are still far apart. However, both have indicated that President Trump and President Xi Jinping could meet at the G‐20 Summit in Tokyo at the end of June. In a surprise announcement, President Trump announced plans to impose a 5% tariff on Mexican goods until the government acts to stop immigrants from entering the US illegally and threatened to increase the rate to 25% by October. Mexico’s exports to the US account for about 80% of total international sales, which equates to about 28% of GDP.

On May 24 U.K. Prime Minister Theresa May said she would resign as Prime Minister after failing repeatedly to win parliamentary backing for the Brexit agreement she negotiated with the European Union (EU). May said she would step down as Conservative leader on June 7, but stay as PM until her successor had been chosen. The next leader of the party will likely be won by a supporter of a sharper break from the EU The new leader will have until October 31 to push a deal through Parliament. All options, from delaying the deadline again, to whether to proceed with Brexit at all, to announcing a second referendum, are all on the table.

Market Observations

US Equities
Weakness in global growth and trade tensions took a toll on equities in May. The S&P 500 declined ‐6.4% bringing the YTD performance through May to +10.7%. As of May 31 US equities had seen six straight weeks of declines, the longest losing streak since 2011. The sector laggards for May were Energy (‐11.1%) and information technology (‐8.7%) as potential antitrust probes into major tech companies took a toll on the industry. Defensive sectors such as utilities (‐0.8%), health care (‐2.4%) and consumer staples (‐3.8%) held up well relative to other sectors.

International Equities
Australia was the shining star (+0.7%) in a tough month for developed international countries. Index provider MSCI upgraded Argentina from frontier market to emerging markets status sending a wave of passive flows into Argentine stocks. The country was up (+12.9%) for the month. Year-to-date performance through May is still positive for developed international (+7.6%) and emerging markets (+4.1%).

Fixed Income
Bond yields fell across the world in May and the US inverted yield curve may be signaling that the Fed is too tight. The 10‐year Treasury yield was 2.14% on May 31 down 69bps over the last year. Flows into municipal bond mutual funds this year have been the strongest since 1992.

Real Assets
Brent Crude has risen from $55.75/barrel at the end of 2018 to $61.99/barrel at the end of May. Oil markets remain relatively tight as we enter the peak summer demand season. Iran has escalated tensions in response to the US decision to let waivers expire on oil‐export sanctions. This is raising concerns over the oil supply in the Persian Gulf, which accounts for approximately 20% of global output. A bottom in China’s credit cycle would be a tailwind for industrial metals given the nation is by far the largest consumer (e.g., 40% of the global copper demand is consumed by China alone). 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 6.12.19.
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 6.12.19 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.