- US Federal Reserve cuts interest rates by 0.25%
- Estimated $14 trillion of global government bonds now on negative yield
- Greek 10-year bond yield falls below comparable US Treasury yield
- Trump maintains firm stance on tariffs
- Further trade talks between US and China set for September
- Boris Johnson becomes new PM and pledges Brexit ‘do or die’ by 31st October
- Sterling falls to 28-month low against US dollar as no deal Brexit risk increases
- Further pick-up in UK wage growth bodes well if Brexit uncertainty can be removed
- European economic activity indicators continue to soften
- ECB examining options for potential net asset purchases
- Chinese manufacturing activity remains in contraction territory
- Shinzo Abe wins Japanese general election convincingly
- Iranians seize British flagged oil tanker in straits of Hormuz
July typically saw further positive momentum in stock and bond markets, with both being supported by expectations of further central bank support. Boris Johnson’s elevation to Prime Minister caused notable weakness in Sterling, which came very close to post referendum lows, as it became clear that he would be taking a hard line on Brexit negotiations.
Sterling weakness proved a welcome short-term development for the FTSE 100, which rose some 2.2% over the month. Elsewhere the S&P 500 rose 1.3%, helped by a reassuring start to US earnings season. European markets underwhelmed with major European shares just finishing the month in positive territory.
The month concluded with a much-anticipated Federal Reserve meeting, expectations were all but certain that interest rates would be cut for the first time since 2008. In the event, rates were cut by 0.25%, however the accompanying commentary cautioned that markets should not necessarily expect this to be the start of a trend. Markets seemingly felt underwhelmed by the comments, which failed to live up to the market hype.
Unsurprisingly Donald Trump took to Twitter once again chastising the Fed Chairman for not doing more, however with the US economy still considered buoyant and employment strong we see little reason for him to be too aggressive – yet, unless of course the US President decides to further damage global trade. The latest round of trade talks between the US and China appear to have concluded without agreement, and it may well be that given the robustness of the US economy, Donald Trump may prefer to look for a deal closer to the Presidential elections in 2020.
By contrast, the Eurozone is in desperate need of stimulus with a worsening economic backdrop, and action is now expected in the autumn. With interest rates arguably as low as they can go, a further round of quantitative easing (QE) now looks highly likely. Globally, there are some $14 trillion of bonds trading with negative yields, much of it in the Eurozone, in expectation of further central bank buying. June saw the German benchmark 10-Year bond yield hit record lows, below -0.43%, and even Greek bonds have seen sizable moves, with the Greek benchmark yield below that of the US.
Boris Johnson commenced his premiership with all guns blazing, fighting the EU on the one hand and preparing the ground for the next general election on the other. Rousing and optimistic speeches were a welcome change to Theresa May’s approach, producing a 10-point lead over a woeful Labour party and perhaps more importantly reclaiming some of the support lost to the Brexit party. However, the honeymoon period which he is currently experiencing may prove short lived given the enormity of the task he faces. Whilst his domestic policy agenda is encouraging, much, including his ability to pay for it, rests on a resolution to Brexit.
The coming months have the potential to be a very uncertain period for the UK economy, a backdrop which is not helpful for businesses. Whilst to some extent Sterling does act as a safety valve, making exports more competitive, it also means imports are more expensive and hence may mean rising prices for consumers, who have latterly been enjoying real wage increases.
Nevertheless, it is encouraging that there has been a pick-up in M&A activity of late, with the combination of a falling pound, cheap finance and company valuations appearing to entice buyers of UK assets to look through the uncertainty. As you would expect, we continue to closely follow developments, mindful of both the risks and opportunities. Following three wasted years, the country is clearly in need of a resolution to Brexit, and we very much hope that the coming months produce one.
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