10th June 2019 

Share markets, except for China’s, rose over the last week on increasing prospects for Fed rate cuts in response to the negative impact of trade wars. This made for a positive environment for pretty much all assets; bonds rising as yields fell and stocks rising on the prospect (or hope!) of further policy easing. This week we have some key data out of China as well as the start of the Conservative leadership contest. However, as has been the case for the last month, expect trade developments to be the main driver of market returns.

Last Week

  • Most stock markets had best week of the year
  • Bond yields fell as US interest rate cuts got heavily priced in
  • Gold continued its rise
  • US jobs numbers fell way short of expectations
  • Global PMI data continued to weaken

This Week

  • This week is fairly quiet in terms of data.
  • In terms of US data, we have Inflation numbers released on Wednesday and Retail Sales on Friday.
  • In addition to the China trade data we had this morning, we have a lot of data over the course of the week. Inflation numbers are out on Wednesday and then on Friday we have Industrial Production, Investment and Retail Sales numbers.
  • In the UK, we have employment data tomorrow and then the official start of the Conservative leadership contest on Thursday.

Last Week’s Highlights​

Stocks had a really strong week, with major US indices (S&P 500 and the Dow Jones) having their best week since November last year, with the broad index up 4.5%. Nearly all markets did well, save for China which continues to be weighed down by trade tensions, with the main market there falling by 2.3% on the week which takes returns for the year to 14% (positive).

Government bonds continued their rally last week, with the yield of US 10 Year Treasurys and UK Gilts getting to a 20 month low; 2.07% and 0.81% respectively. This came on the back of poor US jobs data, generally weak recent economic data and hopes of a rate cut by US policy makers. This was good news for returns of these assets, with UK Gilts up 1% over the week as nearly all areas of the bond markets did well. High Yield bonds were up 0.9%, with Emerging Market bonds up 0.8%.

Bond futures markets increased their probabilities of rate cuts by the US Federal Reserve following a slew of poor economic data of late and also rising trade tensions weighing down on global growth. On Thursday, Fed Chairman Jerome Powell said he was ready to take appropriate action if protectionism were to have a bigger impact on the outlook for growth. This was taken to mean that he would push the Committee to cut interest rates, with bond market futures now pricing in an 80% chance of a cut at the July meeting and then 2 further cuts over the course of the subsequent year.

Gold continued to re-assert itself as a safe haven asset, rising by 1.8% over the week and is now up over 7% since early May. It has now broken through the psychologically important level of $1300/ounce and is now at its highest levels since February this year. Gold tends to do well when real interest rates are negative, which may well be the case if the US Federal Reserve cuts interest rates as the market expects.

The US economy posted a really weak jobs number on Friday afternoon. Counterintuitively, this was taken really well by the markets! 75,000 new jobs were shown to be created in May which was a long way short of the consensus estimates for 160,000 new jobs. This was taken as a further sign of the slowing US economy and a further reason that the US Federal Reserve should cut interest rates; hence the equity market doing well off the back of it. Although the headline number was bad, other employment data was stable. The Unemployment rate remained steady at 3.6% (a 49 year low) and the broader measure of unemployment (U6) dropped to its lowest level in 19 years, with average hourly earnings falling back to 3.1%.

One of the key areas of weakness in economic data recently has been from the global manufacturing sector. The JP Morgan global purchasing managers’ index fell to 49.8, the lowest level since October 2012, with more than half of the world’s manufacturing PMIs contracting in May. This data came alongside the World Bank lowering its growth forecast for 2019 from 2.9% to 2.6%.

Asset Returns

Equities & Oil: returns are all in base currency, save for Global and Emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP. Source: Bloomberg.

UK 10 year bond yields fell to lowest levels since October 2016 as weaker growth data hints at interest rate cuts

Source: Psigma / Bloomberg

Rory McPherson
Head of Investment Strategy