A pause for breath

US equity markets gave ground on Tuesday. The leading index gave back just under 1%. The blame for the setback was put at the door of the usual suspects. Comments made by members of the Federal Reserve playing down expectations of a 50bp cut in interest rates at the July meeting. According to Barron’s the meeting between Xi and Trump may cover more than trade? In reality, a pause for breath as US equities have risen almost 20% this year is hard not to be expected.

"May you live in interesting times" purported to be a translation of a traditional Chinese curse. For equity and bond investors, from the recovery in 2008, times have been interesting but more of a blessing rather than a curse. However, equity and bond investors must think that “interesting” does not go close to describing the times we now live.

The latest flash US Purchasing Manager Surveys suggest that manufacturing and services, the latter had been holding up well, are now close to contraction territory. The tensions in the Middle East continue adding further uncertainty. The WTO weighed in on the debate stating that rising trade barriers could cripple the global economy.

Currently, we have now 13 trillion dollars of negative yielding assets around the globe. We have US stock markets at all-time highs, despite data suggesting that there is a distinct possibility of a US recession in the not too distant future. The equity markets performance continues to suggest the greater the recessionary risk, the greater the probability the Fed will cut rates, underpinning risk assets. The President of the United States continues to undermine the Fed. Even using a well-known football terrace chant to referees, “you don’t know what you are doing”, to make his point. Fund flow data continues to suggest retail investors don’t trust the recovery, for many a good reason, as funds flow away from equity funds despite the continued rise in the underlying assets. The Bitcoin, an asset entirely impossible for value, is now valued at almost 11000 dollars. The Bitcoin would now appear to be a store of value rather than an expression of risk tolerance.

Currently, the state of the nation feels rather like the adage everything changes and everything stays the same.

Posted on June 26, 2019 .