Strategy & economics
Market Update - June 2019
Six months ago the market expected two US rate rises in 2019. Now, midway through the year, markets are anticipating the next move to be a cut
Tariff threats trigger renewed volatility
We have long been expecting to see higher volatility in markets and it has materialized over the past month. The trigger was the escalation in global trade tensions, with the US imposing tariffs on Chinese and – unexpectedly – for a brief period also threatening Mexican goods.
While this may be a negotiating tactic to secure political concessions, the moves emphasised the unpredictable nature of current US policy making and will do little to help business or consumer confidence. The developments will likely renew concerns about a US recession in 2020 and increase the downside risks to our outlook for positive, but slowing, global growth.
Stock markets are now wary about the prospect of tariffs elsewhere, with speculation that European cars could be next.
Expectations of rate cuts
If growth does slow significantly as a result of trade tensions, the Fed is likely to act to support the economy and cut interest rates. Bond markets are now clearly expecting such a move, potentially this year. This is a marked change from last December when the market was still expecting two interest rate rises.
Brexit resolution remains elusive
Closer to home, political developments have opened the door to a wider range of Brexit outcomes. As a result, sterling could become more volatile and move significantly from current levels. Despite valuations looking attractive, we think that domestically-exposed UK equities are unlikely to make headway while Brexit uncertainty persists – which could be for many months.
We have maintained our neutral exposure to equities and still expect modest earnings growth this year. However, we are becoming more defensive. In early May, we locked in some of our gains in portfolios with significant equity exposure. We are prepared for more elevated levels of volatility and our higher-than-usual allocation to cash will allow us to take advantage of opportunities that may arise. We also remain well diversified, helping to reduce risk.
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