Stockholm (Ekonamik) – Week 26 of 2019 was relatively calm. There was very little in the way of surprises be it from data or from monetary policy decisions. Concerns about the effect of tariffs seem to remain a fact while in financial markets liquidity issues
In Mexico, the central bank held rates constant at 8,25%. “Since the last monetary policy decision, domestic financial markets underwent episodes of volatility due to the threat of tariffs on Mexican imports by the U.S. and to the revisions to the outlook or the credit rating of sovereign debt and of Pemex’s debt by some rating agencies,” the accompanying press release noted. “Nevertheless, more recently, given the agreement reached between the governments of Mexico and the United States, and the greater risk appetite among investors in view of the outlook for more accommodative monetary policies, the peso exchange rate reverted its previously observed depreciation and government securities’ long- and medium-term nominal and real interest rates decreased significantly.”
Over the border, tariff concerns were also prominent for consumers in the USA. The June Michigan Current Conditions Survey noted that the Index of Consumer Sentiment was slightly down. “June’s small overall decline was entirely due to households with incomes in the top third of the distribution, who more frequently mentioned the negative impact of tariffs, cited by 45%, up from 30% last month,” commented Surveys of Consumers chief economist, Richard Curtin. “Most of the June slippage was concentrated in prospects for the national economy, with the unemployment rate expected to inch upward instead of drifting downward in the year ahead.” Consistent with these stagnating prospects, both Kansas City Fed Manufacturing Index and the Richmond Fed Manufacturing Index were basically unchanged in June from their recent downward trends. Not inconsistently, the Chicago Fed National Activity Index, which has some forecasting power for inflation was also measured at -0.05, up from -0.45 in May.
Across the pond, the Eurozone was still digesting the June 18th speech Mario Draghi gavr in Sintra, which was widely interpreted to signal more easing, most prominently by President Trump. “We now expect the ECB to adjust its forward guidance in July to indicate that policy rates will remain at present levels or lower through at least the first half of 2020,” commented Cesar Perez Rui, Pictet’s chief investment officer, in response to Draghi’s speech. “We also expect the central bank to cut the deposit rate by 10 basis points to -0.5% in September. As a result, we are turning more positive on European credits,” he added. Still in Europe, Eurostat reported that Eurozone “annual inflation is expected to be 1.2% in June 2019, stable compared to May.” Energy, services and food, alcohol and tobacco were the main contributors to inflation. No progress
Liquidity Concerns, Apple Departure and a Gold Surge
The main financial story over the last week has been the mounting concerns about liquidity at a range of investment managers. Woodford Investment Management, GAM and H2O have all been exposed for their troubles with liquidity. In the beginning of June, Woodford was shown by an investigation from the Daily Telegraph to have invested too large a share of his fund into illiquid assets. Following the revelation, dealing was suspended in his flagship Equity Income fund. This week, H2O came under scrutiny following revelations that the 6 of the company’s funds ha illiquid “bond holdings linked to Windhorst, who has faced the insolvency of two companies, personal bankruptcy and a suspended jail sentence”. Moreover, as noted by Mara Dobrescu, Morningstar associate director of fixed income strategies, the appointment of H2O founder Bruno Crastes to the advisory board of Windhorst’s investment vehicle Tennor Holding raised “the appearance of a possible conflict of interest”. The revelations raised concerns at Morningstar, whose involvement quickly deflated H2O’s initial bravado. These concerns were eventually picked up by policy makers. “These funds are built on a lie, which is that you can have daily liquidity for assets that fundamentally aren’t liquid,” he told MPs,” commented BoE Governor Mark Carney during a committee hearing in the house of Lord. Perhaps unsurprisingly, given these liquidity issues, Greenwhich Associates reported US$ 3.78 billion in outflows from hedge funds in May.
Among corporates, the departure of Chief Designer Sir Jonathan “Joni” Ive from Apple grabbed everyone’s attention this week. As the man responsible for the design of all of Apple’s flagship products since the turn of the millennium, concerns emerged about the future of the tech giant following his release. Investors might be assuaged by reports that the first client of Ive’s new creative firm, LoveFrom, will be Apple and that LoveFrom will focus on wearable tech. Perhaps, Ive might finish some of the work Apple is suspected to have started on its smartglasses.
One of the best-performing markets was gold which during the month of June gained 10%, leading to hopes the rally might reach US$1,550. Looking back at the original coverage of the news at the start of the month, when most of the appreciation took place, the price increase seems largely motivated by the belief that last month’s unimpressive labour data is likely to motivate the Fed towards lowering rates, as was confirmed last week. If so, market analysts will be eagerly awaiting by their screens on Friday next week, as June labour figures come out.
Global Equity markets had a mix performance. The S&P 500 index, Italy’s FTSE MIB and Stockholm’s OMX 30 were marginally down. France’s CAC 40, was fairly unchanged, and the UK’s FTSE 100, Germany’s DAX, and Portugal’s PSI 20, were all slightly up. In bond markets, the US Treasury yield curve fell and flattened with the 10yr-3month term spread increasing from -11bps to -12bps. In China, the opposite took place with the yield curve steepening as the term spread increased from 100bps to 104bps over the week.
The noisy corner
As expected, the G20 facilitated a range of opportunities for leaders to misbehave and be noisy. Ahead of the meeting, Trump ruffled establishment feathers by suggesting that while the USA was unfairly obliged by international treaties to assist Japan in case the Pacific nation came under attack, the opposite did not hold. At the actual meeting, Putin made sure he was in the news by claiming once again that liberalism is obsolete. Trump meanwhile seems to have achieved the unusual feat of uniting all of Spain by ostensibly dismissing Pedro Sanchez, the country’s prime minister.