Insight Multi-Asset weekly update

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Market and economic review

Risk sentiment buoyed by a positive outcome from the recent Trump-Xi meeting

Risk assets began last week on a strong note as the widely anticipated Trump-Xi meeting at the G20 summit paved the way for a potential de-escalation in the ongoing US-China trade tensions. Although any concrete resolution still remains out of immediate visibility, the recent meeting did deliver on market expectations on multiple fronts. The two big positives were suspension in any further tariffs on Chinese imports and a softening in the US stance on Huawei, including a possible removal of the ban on US companies doing business with Huawei.

The avoidance of further escalation in trade tensions over the weekend saw equities begin the week on a firm footing with Chinese equity markets witnessing a 3% rally. US equities were not to be left behind as they added another 1% performance on the day. The strong tone continued throughout the week across risk assets as global equities gained 2%.

Overall, the week saw progress on multiple political issues including a surprise meeting between President Trump and the North Korean leader Kim Jong Un, and positivity over US-Turkey relations.

Strong support for fixed income assets continues

Fixed income assets began the week with a relentless rally against a background of muted inflationary outlook and supportive central banks. US Treasury yields fell by 8bp in the first half of the week while German 10-year yields fell by 5bp. A more visible move was, however, in Italian yields as they fell by 36bp. This was triggered by the European Commission reports confirming that Italy would avoid disciplinary actions over its budget. The rally saw Italian 10-year yields below 2% for the first time since May 2018, resulting in a spread of 232bp over German rates.

There were also two key announcements in European politics as Ursula von der Leyen was nominated to be European Commission president, with Christine Lagarde nominated to succeed Mario Draghi as European Central Bank (ECB) president. The rates market reacted positively, possibly because a more hawkish individual was not chosen to head the ECB. A similar reaction was observed in the US market when President Trump announced two nominations for the Federal Reserve (Fed) Board of Governors, Judy Shelton and Christopher Wallace. Wallace in particular is likely to support lowering rates given his background working with Fed governor Bullard (one of the most dovish members of the committee).

Recent data releases continue to indicate a lacklustre global growth outlook

In a week dominated by positive news on the political front and central bank policy, economic data releases continued to cast a dampener on the growth outlook. Starting with Asia, the Chinese Caixin PMIs dropped into recessionary territory printing at 49.4 against an expectation of 50.1. This was the weakest reading since January, with both the new orders and export orders components falling into contractionary territory. 

In Europe, the final manufacturing PMIs were revised down to 47.6. The declining trend continued in individual countries including Germany and France. The biggest decline was, however, seen in Spain where the latest release fell by 2.9 points from its previous reading in May (47.9 versus 49.5 expected). The services PMI in the eurozone were slightly more positive, with the latest headline level revised up by 0.2 points, taking the composite June PMI to 52.2.

The UK was no exception with regard to weakness in economic data. The manufacturing PMI plummeted to 48 against a consensus reading of 49.5. The details showed that output fell and new orders remained in negative territory as well. The construction PMI was worse, as the June reading printed at 43.1, down by 5.5 points from its previous release.

Given the considerable focus on the US economy and its potential impact on monetary policy going forward, the ISM manufacturing and employment data in the US were two of the most anticipated releases of the week. Although the headline ISM numbers were better than expected (51.7 vs 51), the new orders component was disappointing as it fell by 2.7 points from its previous reading. This release continues the trajectory of falling headline levels, with the latest manufacturing release being the lowest since October 2016.

The final data release for the week was US employment data. Surprising on the upside was a headline figure of 224,000 additional non-farm jobs created, versus a consensus of 160,000. That said, there have been only two readings in the past five months above 200,000, with the trend still pulling downwards. On the flip side, the average hourly earnings were fairly steady, offsetting any feed through into higher inflation. The case for a rate cut is now very much in focus, with the main point of debate being the actual quantum

Outlook

Post the ISM and payroll data releases, the Fed will be in the spotlight. Markets will be keeping a close eye on Fed Chairman Powell’s testimony before the House Financial Services Committee on Wednesday, looking for possible clues about the widely anticipated rate cuts. The content of this speech has the potential to meaningfully impact market expectations as the Fed chair is expected to express his latest views on the state of US economy. A couple of other Fed speakers, including the notably dovish Bullard, are also scheduled to speak next week in different events. 

As government bond yields have continued to grind lower, the inflation data releases will be of particular importance. The June CPI report for the US is due on Thursday with the broad consensus of an annual rate of 2% year-on-year. Chinese and European inflation prints are also due with final June CPI revisions for Germany and France.

As markets continue to navigate their way through a period of weakening growth data balanced by supportive monetary policy, any developments on the US-China trade talks will continue to have an impact on broader risk sentiment.

By Adam Kibble, investment specialist

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