It is sometimes said that equity investors look for opportunities, whereas bond investors look for problems.
Over-simplification it may be but, all the same, markets currently present a curiously two-sided picture. On the one hand, equity markets remain in rally territory, even though the S&P 500 and FTSE 100 ended last week marginally lower than where they had begun. In part, this continued optimism reflects positive corporate earnings, continued hopes that a US-China trade deal can indeed be reached, and growing confidence that central banks have got the market’s back – via potential rate cuts and perhaps even more quantitative easing (QE), the process by which central banks buy up bonds to provide support to the market and boost growth.
The Fed’s recent dovishness has not sated the growth-hungry US president, who last week described Fed policy as “insane” and said Jerome Powell, the chair, is doing a “bad job”. Trump argued that the Fed could perhaps do with Mario Draghi, ECB governor, running the show – presumably because he’s recently shown willingness to offer even more support to the market than the Fed. Draghi would, said Trump, be a better fit “instead of our Fed person”.
The optimism at large on equity markets is not shared by bond investors, however. Such worries have shown up in the recent slide in bond yields – and especially in the yield on the 10-year US Treasury, which last week dipped below 2% for the first time since 2016. (Investors tend to buy up Treasuries, thereby pushing down yields, when they are worried about the global economy and running for safety.)
Yet the conundrum – optimism on equity markets, fear on bond markets – may be best explained by the machinations of central banks. It is precisely the worries of central banks that are leading them to consider rate cuts and further market support. Yet for equity investors, the promise of extra support for the market via QE, and extra support for businesses via lower interest rates, provides hope that growth can continue.
Despite all the fuss over central banks, there was continued focus last week on geopolitics and trade, and inevitably it spilled over onto markets. The White House imposed additional sanctions on Iranian officials, including Ayatollah Ali Khamenei to prevent them accessing “financial instruments”. (Trump unilaterally withdrew the US from the 2015 nuclear accord last year.) Gold and Treasuries rallied in response, before Iranian officials hit back and said Khamenei has no foreign bank accounts to curb.
This might have presented a still more tense backdrop for the G20 meeting in Osaka over the weekend. In reality, however, China-US trade relations was the biggest show in town and, on that score, the White House provided hints in the run-up to the meeting that a deal was likely to be struck before long. Steven Mnuchin, US Treasury secretary, said a US-China deal was 90% of the way to completion. His comments pushed up stocks, even as some weak US economic data hinted at slowing growth. Indeed, for all those nations represented, the G20 was probably more about the ‘G2′ of the US and China than anything else. Japan, the host, even went so far as to dilute its planned action on climate change in order to placate Washington ahead of the summit.
As it turned out, news that President Trump and President Xi had reached agreement to resume trade talks was greeted positively by markets in early trading, albeit potentially providing only short-term relief. The US President also reversed a ban on American companies selling to China’s Huawei and announced that the US would not ramp up tariffs on Chinese goods “for the time being”.
“This certainly doesn’t mean the trade war is over as there is still much for the two sides to agree on,” said Chris Ralph, Chief Investment Officer of St. James’s Place. “That they are talking again is a positive, but I think a deal is more likely only as we head towards the 2020 US elections.””
It was a significant week for Japan plc too, as three days of shareholder meetings across major companies dominated the business agenda. A record 54 companies faced shareholder proposals, making it a tough ride for several major companies. Going into the meetings, foreign investors had been net sellers of Japanese stocks for six weeks; but any signs that shareholder activism is bearing greater fruit in Japan could yet persuade those investors to do an about-turn.
The UK has also been suffering from a lack of investor confidence. Data last week showed that foreign investment in the UK fell by 14% in the fiscal year to March 2019 – its lowest in six years and a second consecutive annual fall. Investment in Central London offices, meanwhile, fell by more than a third in the first half of this year, according to Cushman & Wakefield. Last week PSA, the car manufacturer, committed to making its next Vauxhall and Opel Astra cars in the UK only if a no-deal Brexit is avoided.
Boris Johnson, the bookies’ favourite to succeed Theresa May next month, has offered conflicting signals over the possibility of a no-deal outcome in hustings last week, saying, on the one hand, that he will ensure the UK leaves the EU by 31 October and, on the other, that the odds on a no-deal outcome are “a million to one against”. If the bookies are right, he will soon have the chance to fulfil his forecasts.
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