All eyes are on the Fed
- The first half of 2019 represents a record period for world stock markets
- Woodford causes industry ripples
- World Bank cuts its global economic growth outlook
- G20 meeting - resumption of US/China trade talks and a pause on further tariffs
- Trump administration reaches agreement with Mexico on immigration following tariff threat
- Iran shoots down $100m US surveillance drone bringing US within 15 minutes of military strike
- US Fed adopts more dovish stance
- Trade tariff uncertainty overhanging Chinese economy with sharp drop in imports in May
- Boris Johnson remains the front runner in the Conservative leadership contest
- Soggy start to summer hits UK retailers
- UK manufacturing sector contracts as stockpiling ahead of original Brexit eases
- Retiring head of the ECB, Mario Draghi suggests it could introduce more stimulus measures
- EU progressing towards imposing an Excessive Deficit Procedure against Italy
Whilst economic data continues to concern, stock markets were propelled higher by the growing probability of central bank stimulus and falling global bond yields. The easing of global trade fears, that had severely impacted sentiment in May, also helped sentiment.
Consequently, the S&P 500 had its best June since 1955 rising some 6.9%. Having held up relatively well in May, the FTSE 100 was up 3.7% and major European indices climbed 4.9%.
Both the Federal Reserve and the European Central Bank said what markets wanted to hear at their respective meetings during the month. Markets are now all but fully pricing in an interest rate cut by the Fed at their next meeting at the end of this month. The fall in bond yields, which at one point saw the benchmark US 10 year fall below 2%, and the resulting reduction in the cost of borrowing have driven global share prices higher. Typically, investors don’t chase riskier assets at the same time as safer Government bonds.
The G20 meeting was overshadowed by the side meeting between Presidents Trump and Xi. The resulting political ceasefire, has seen the resumption of trade talks, a pause on further tariffs and some loosening of the US position on Huawei. Whilst a welcome short-term development, the outcome bears striking similarities to when they met during the G20 meeting in Argentina in December. This ultimately achieved little, other than a few days of positive headlines. As such, the coming weeks will be closely watched for evidence of actual progress.
The oil price also took part in the recovery. Buoyed by ongoing tensions in the Middle East following a second attack on ships in the Strait of Hormuz and the downing of a US drone by Iran. In the short term, the US is favouring sanctions over a retaliatory strike. Whilst still high, tensions in the region appear to have eased somewhat whilst the US, EU and Iran ponder actions in this politically sensitive region.
Sterling had a volatile month, at one point nearing 12-month lows against both the Euro and US Dollar, as Boris Johnson consolidated his position in the Conservative leadership contest. Whilst a favourite amongst the Tory members, it remains to be seen what sort of leader he would make, nevertheless he does appear, for better or worse, to be the candidate most likely to break the Brexit deadlock.
Following a difficult end to 2018, stock markets have just had one of the strongest first halves to a year ever. Economic data has continued to point to a more challenging outlook, with numerous forward-looking indicators, notably in global manufacturing, flashing warning signals on the outlook. The ongoing global trade tensions are continuing to prove a key problem here, given the damage to corporate confidence.
With central banks seemingly in accommodating mode, markets appear supported in the near term. Nevertheless, with the exception of the USA, interest rates amongst the world’s largest economies are already exceptionally low, and as such, further unconventional policies, such as QE, would likely be required. From a longer-term perspective, progress on trade would be the preferred and safer solution to drive economic growth. However, in the nearer term, it looks likely that stock markets will continue to take their lead from central banks.
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