Markets rebound amid mixed economic data

Market Update

Equity markets rebounded last week as a combination of hopes of a delay to US tariffs on Mexico, and increased expectations for interest rate cuts in the US, saw positive performance every day from Wednesday onwards. Weak nonfarm payrolls on Friday of just 75,000, below expectations of 185,000, offered further evidence to those who believe that a fall in US rates is imminent. Despite weak US Dollar performance on account of the rate cut expectations, US equities were the strongest major region in Sterling terms, up +3.5%. European equities gained +3.1% and UK equities +2.5%, with Japanese and Emerging Market equities lagging on +0.8% and +0.1% respectively. Sterling had a mixed week, up +0.9% against the US Dollar, however down -0.6% vs the Euro. It was also a positive week for fixed income, with yields falling across the board: UK 10Y Gilt yields fell -7.3bps to 0.815% and US 10Y Treasury yields fell -4.4bps to 2.081%. Gold gained +2.7% in US Dollar terms, while Oil was up +0.9%.

CIO Analysis

Last weekend, Boris Johnson, the front-runner for the Tory party leadership, suggested that he would withhold payments agreed with the EU over the Brexit Bill. France’s President Emmanuel Macron suggested that this would amount to a sovereign default. Looking to stay within touching distance of Johnson, other key Tory candidates followed. While the legal status of these payments is not clear, the overarching story is really interesting: “If it is just a treaty, then we can back out at will”. But then, what is the point of a treaty? What is the point of any trade deal? Treaties may reflect a particular dynamic at a given time period, and as time changes they may be in need of an update, or an overhaul, to reflect the current dynamics. They often stay in place, however, because of the need to foster stability, despite temporary shifts in balances of power. If we scrapped the idea of honouring obligations altogether, then the world created would be one of casual alliances and raw strength, over one of stability. As the global leader, the US is spearheading the drive towards this new reality. In terms of investments, this means a structural pick up in volatility, which does create opportunities, however systemic risks are still in check, as long as investors trust central banks. In a manner, maybe the very accommodative functioning of central banks themselves has fostered political moral hazard. The question, going forward, is will central banks, the pillar of the global economic and financial system and the main driver of growth in the past few years, fall themselves victims of this sea change in the global political order. That’s when investment risks may become systemic.

George Lagarias, Senior Economist

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *