In the wake of the intensification of the trade conflict between the USA and China, the leading economic indicators have weakened further.
Despite of the reset
during the G20 summit, trade war will be an ongoing concern. Global growth is slowing and will remain subdued in most regions of the world in H2. Accordingly, price pressure will remain rather low, giving the central banks room for manoeuvre in monetary policy
Both the FED and ECB
have signalled that they will lower their
key interest rates if necessary, in order to counteract economic
uncertainty. The message from the bond markets to the
centrals banks is clear: the economic outlook is not great;
interest rates must go down. Although the FED kept its key rates
unchanged in June, one rate cut in July has become very
probable in the meantime.
The option market is pricing in
almost three rate cuts by the end of this year which we think is
slightly exaggerated for the time being.
Looking at the macro picture,
the slowdown in growth is a fact
and it is not realistic to assume that the global economy will pick
up speed over the summer months. Therefore, the composite
index of US leading indicators stagnated
in May and for the
second half of the year it now signals a significant slowdown in
growth. For now, within EZ, the latest ZEW survey results
indicate an almost dramatic setback
of the economic
expectations, which have been particularly dampened by the
fact that the economic engine Germany has come to a
standstill. Furthermore, the Ifo-Index was published lower for
the ninth time in a row
and lies as low as four and a half years
ago. The industry sector is in crisis and the weak phase has
increasingly grasped the service sector.
What speaks for a positive sentiment is the fact at the G20
meeting President Trump and China agreed on a trade truce,
with the US refraining from imposing further tariffs and China
offering to buy an unspecified large amount of US agriculture
products. Negotiations on a trade agreement will resume, with
no further details on the next steps.
Fixed income markets
performed strongly last month, with
pricing in more that 80bps in rate cuts from the FED. Even if the
easing measures materialize, the further downside potential for
bond yields seems limited at short end maturities, additionally
capping the return potential. With spreads expected to be
and government bonds likely to
underperform, we see HY and EM bonds as more attractive.
However, considering limited return potential we increase
slightly to a neutral stance.
Equity markets love the loose monetary stance
banks and created a festive mood. However, we see larger
divergence arising between the real economy and the valuation
of the equity markets.
Hence, we confirm our cautious stance
and remain slightly underweight but prefer quality and growth
should continue to range trade due to the battle of
weaker currencies on both side of the Atlantic – with declining
carry advantage of the USD. Gold
performed strongly last
month, boosted by lower yields and weaker USD. We may see
higher bottom above USD 1400 in the coming weeks. Oil prices
bounced again in June as supply risks increased amid rising
tensions in the Middle East, which have lifted the likelihood of
a tail-risk outcome. Yesterday, OPEC signaled to extend oil
production cuts to keep oil prices higher.
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