Market Review June 2019 (covering May)

Following the strong start to the year, May proved a disappointing month for stock markets as events conspired to undermine sentiment.

Market Review June 2019 (covering May)
Ermin Fosse

Ermin Fosse



  • Global growth outlook shifts interest rate forecasts, prompting talk of rate cuts
  • Sterling falls by more than 3%, one of the worst months since 2016
  • Trump raises stakes in China trade tariff spat
  • US Government blocks all business transactions with Huawei on grounds of national security
  • China threatens retaliation and may block rare earth mineral exports to the US
  • Trump to impose escalating tariffs on Mexico unless it tackles immigrants crossing the US border
  • In the UK, Theresa May stands down as Conservative leader on 7th June
  • Conservative leadership contest underway with Boris Johnson the bookies favourite
  • Conservatives and Labour hammered by Brexit party and Liberal Democrats in EU elections
  • European political background complicated by EU election results
  • EU Italian budget deficit challenge drives Italian 5-year bond yield above that of Greece
  • Middle East tensions build - US suspects Iranian mines of damaging oil tankers

Political developments in Europe and the UK combined with a hardening of relations between the US and China to drive risk aversion. For good measure, Donald Trump also opened a fresh front in his trade confrontation, this time targeting Mexico.

Having touched a fresh all-time high earlier in the month, the S&P 500 proved particularly vulnerable to profit taking, falling some 6.5%. The FTSE 100 fared a little better, but still fell 3.5%, with a weakening currency offering some support. Elsewhere major European shares also proved weak, down some 5.5%. Fears over global growth coupled with the prospect of central banks having to cut interest rates benefitted global bonds.

Against a backdrop of rising economic uncertainty Jay Powell, Chairman of the US Federal Reserve, is under growing pressure to clarify the Fed’s stance on US interest rates. Consequently, 10-year Treasury yield fell to its lowest since late 2017. The German Government bond yield hit a record low of -0.2%, with holders happy to continue to pay for the perceived safety of holding them. By contrast Italian bond yields rose, reflecting growing concerns about a confrontation with the EU over Italy’s budget proposals and the growing risk from far-right populist Deputy Prime Minister Matteo Salvini. At €2 trillion, the scale of Italy's bond market poses a risk for the euro-zone and global financial system. 

Were the hardening of relations between the world’s largest trading partners not enough to keep markets on edge, Donald Trump unveiled something of a bombshell, via his twitter feed, focussing on one of America’s other significant trading partners, Mexico. Both the surprise of the move as well as his willingness to use trade as a weapon rightly proved unnerving, given the potential damage to the world economy.

Less of a surprise was the long-mooted resignation of Theresa May as Prime Minister. Due to a fracturing Conservative Party, her position had become untenable. With the resulting leadership contest and the likelihood of some form of attempt at renewed dialogue with the EU afterwards, the UK looks set to have a busy summer on the political front. Faced with the increased risk of a ‘no deal’ Brexit, Sterling was weak, falling nearly 3% against the US Dollar.

Whilst investors will be pleased to see the end of what proved a challenging month, it should be remembered that markets have typically performed well in the year to date. Nevertheless, the latest trade developments have clouded the outlook for the global economy, and as such sentiment is likely to remain fragile. Clearly, the more vulnerable the outlook becomes the higher the likelihood of supportive policy from central banks, and it is noteworthy that the futures markets are now pricing in a greater than 50% chance of an interest rate cut by the Federal Reserve as soon as September.

We start the summer months with a cautious outlook and continue to closely monitor trade developments, mindful of both the risks of a further deterioration as well as the opportunities that would result should the tone around negotiations improve.

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