Market Insights – 1st of July 2019

Each week, a team of experts shares its market views with you.

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The G20 summit ended with another truce in the spiralling trade war: President Trump withdrew his threat to impose tariffs on the remaining USD 300bn in Chinese imports and agreed to resume trade talks. However, he did not backpedal on the tariff hikes introduced in early May, or on setting a deadline for reaching a deal.

The Swiss stock market entered uncharted territory this week after the European Union withdrew its ‘equivalence’ status. This decision should not affect investors too much in the short term, even though Swiss securities can now only be traded on the domestic market. In the longer term, however, it is difficult to tell what the consequences of this power struggle between Switzerland and the EU will be.

After breaking through key resistance levels, gold prices dropped back to USD 1,400 per ounce. Gold’s recent momentum seems to be driven more by the US dollar’s decline than by the trend in other risk-free assets.

Normalisation can wait

Central bankers have been having a tough time lately. After the 2008 crisis, they were considered almost like heroes for having saved the financial system. But now they have come under a lot of criticism in many countries. Some people have accused them of being sorcerers’ apprentices who continue to experiment with unconventional methods that are a far cry from the monetary doctrine in place since the Second World War. Others think they have not done enough, just like Donald Trump. To him, the Fed chair’s overriding preoccupation with inflation – which has yet to rise – has weighed on US growth.

In any event, central banks are now being forced to respond to the worsening macroeconomic climate. A major change of course is taking place, and policy normalisation is now out-dated. In light of the potential slump in international trade and the sharp decline in inflation expectations, the Fed and the ECB have already announced rate cuts in the second half of the year.

The bond markets were quick to react: long-term yields dropped sharply around the world and even fell to record lows in Europe. This further decline in yields suggests that the business cycle yet has not come to an end and, despite its maturity, remains far from the overheating typical at the end of a cycle. In this climate, risk assets, and particularly equities, are likely to outperform. This is especially true given that investors’ expectations are at rock bottom as a result of concerns relating to the US-China trade tensions and the complex geopolitical situation in the Middle East.

Unless there is a dangerous escalation on one of these fronts, we think it is worth staying overweight equities. They offer the best prospects and, in general, are reasonably priced relative to other asset classes. It is worth noting that central bank decisions are likely to have a huge impact on the forex market. If interest rates are lowered considerably in the USA, this would hit the dollar. And if other central banks fail to act, their currencies may gain ground. The Swiss National Bank and the Bank of Japan, for example, have kept strangely silent. As a result, we are reducing our exposure to the dollar and upping our exposure to the yen within our investment grids. We are also increasing our exposure to the Swiss franc in CHF-denominated portfolios, at the expense of the euro.

USA: the G20 brings some respite for investors

The worst-case scenario did not materialise at the G20 summit this weekend, and in the end a truce was reached between the USA and China. This should allow the two trading partners to potentially reach a lasting deal in the coming months. Investors can therefore shift their focus back to US economic fundamentals, which suggest that the business cycle will be extended. This, in turn, will provide a further boost to equities.

Although the economic slowdown has not spared the USA, activity indicators, especially in the services sector, are still firmly in expansionary territory. These figures can always deteriorate, of course, but current levels are compatible with GDP growth of around 2% in 2019 and 2020. With unemployment at rock bottom, consumer spending is still the main driver of GDP growth. For the first time in more than ten years, the Fed is getting ready to loosen its monetary policy over the summer by cutting its key rate. In the past, equities have done well out of rate cuts, which increase their appeal relative to the lower returns offered by bonds. Although our optimism is curbed slightly by high share prices, we think that the latest developments in the trade war and the Fed’s more dovish stance are good reasons to remain overweight US equities.


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