The Financial Landscape – September 2019
Global Macro Environment
Global Growth Slowing
Economic data in Europe continues to be unpromising. Brexit uncertainty continues to rattle the UK economy. The results led the European Central Bank to cut the key interest rate at their September meeting. The ECB also launched a fresh new package of bond purchases, a move aimed at insulating the Eurozone’s faltering economy from the global growth slowdown and trade worries. Data coming from Asia, specifically Japan and China, has been lukewarm. Tensions in Hong Kong and Japan’s upcoming VAT hike in October have been headwinds for both countries. The labor market, household finances and the US consumer are keeping recession odds at bay. The latest reported retail sales and private expenditures numbers reached all-time highs. However, consumer sentiment may begin to show signs of weakness as tariff fears continue. Consumer sentiment (e.g., University of Michigan) weakened in August, and the Institute of Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) fell below 50 indicating a contraction of the index. Non-manufacturing is still providing good support 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 cut interest rates another 25bps at the September meeting. A 50bps cut was floated around as a possibility by analysts and economists but the US jobs report put that to rest. At the previous rate cut meeting, Chairman Powell referred to it as a “mid-cycle policy adjustment.” Markets will be watching for any other signals it can glean from the Chairman, as the trade war and global economic outlook have not improved since the previous meeting.
The US and China are looking to get back to the table after China imposed tariffs on $75 billion worth of additional US products and President Trump indicated he regrets not escalating tariffs further. Chinese experts at the Hudson Institute think this tactic is exactly how President Xi and his advisors want to play it. They believe they can extract better terms by not hurrying into concessions, but also want to appear willing to negotiate. The reality is that nothing material has changed between the two countries recently and so any future talks make a large deal highly unlikely. The Hong Kong situation is another risk to monitor as protests have gone back-and-forth between peaceful and violent. Millions of demonstrators have taken to the streets to protest a now shelved extradition bill and full democracy.
British lawmakers voted to again delay Brexit, thwarting Prime Minister Boris Johnson’s signature pledge to take Britain out of the EU at the end of October and setting the stage for a general election this fall.
A flight to safety by investors worried about global growth, America’s trade war with China and now a currency battle led equities lower in August. Defensive areas of the market held up relatively well, which should not be a surprise given the fact that the entire US yield curve trades below the Fed Funds Rate. Earnings and revenue growth came in better than expected for the second quarter (+3.2% Y/Y earnings and + 4.7% Y/Y top line revenue.)
International equities stand to benefit from the recently announced stimulus package by the ECB. European industrial stocks have performed well this year and could see a tailwind from this policy decision. Given the tight trade relationship between China and emerging markets economies, additional stimulus implemented by China to prop up their domestic economy could be beneficial.
Global bond yields this year have closely tracked the course of global growth. Global liquidity and low sovereign yields of major European countries have been key to the fall in US Treasury yields. Recently, dollar quality and a flight to safety have further accelerated the fall in yields. The 30-year Treasury yield broke below 2% for the first time in history on August 15. The total market cap in negative yields continue to rise around the world.
Crude prices surged Monday, September 16 in the aftermath of the weekend attack on Saudi Arabia’s crude production infrastructure. American officials say intelligence indicates that Iran was the staging ground for a debilitating attack and the officials have shared the information with Saudi Arabia. US crude futures ended the day 15% higher at $62.90/bbl, the largest one-day climb since January 2009. Middle East tensions between the US and Iran should continue to keep oil volatility high. In precious metals, gold prices continue to benefit from safe haven demand.
This Financial Landscape represents the consensus of the Oxford Investment Fellows as of 9.20.19 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.