Q2 2019 RECAP
July 8, 2019
Q2 2019: RISK-ON/OFF TOOK TURNS. BOND YIELDS, DOLLAR DECLINED. EQUITIES, GOLD ROSE.
FED POLICY SHIFT: INFLATION REMAINS LOW, ECONOMY MODERATED, FED FUND FUTURES POINT TO SUMMER RATE CUT. S&P 500 3.7%, NASDAQ 3.5%, EUROSTOXX 50 3.6%, NIKKEI 0.3%
A wild ride best describes the past quarter, as most asset classes saw significant shifts in value. The headline news and narrative were centered in the fixed-income markets, with yields on sovereign bonds declining to levels not seen since pre-election 2016. In the final 60 days, the yield on the benchmark ten-year T-note dropped to 2%; shorter-maturities, most sensitive to monetary policy, saw a sharper decrease. Historically speaking, it was one of the most stunning declines over a short period of time ever. Clearly, it set the tone in the credit markets, and to a large degree in equities as well. Though at the halfway mark of the year, it is unquestionable that the ‘consensus’ forecasts were in another orbit. Most all had bond yields rising, some by wide margins. Instead, a collapse in Treasury yields to close-out 2018 was followed by more of the same lower-for-longer theme that has prevailed over long stretches of time. However, in contrast to last December, credit spreads on corporate bonds – both investment and non-investment grade – narrowed in a meaningful way, providing steam to a powerful rally in the spring.
Equity markets differed. While April and June were splendid, ‘sell in May’ held true to form. Though by quarter-end, the major indices were in-the-black it was not easy! In a similar way to Q1, it was the Federal Reserve and U.S. trade tariffs that controlled the markets, in sentiment and reality. Trade concerns and uncertainties with China spiked in a tweet as what appeared to be a meeting of the minds, near an agreement, veered well off-course. The second-half of Q2 was about repairing the damage done and trying to fit the pieces together again. It took a while, but ahead of a much-anticipated Trump-Xi meeting in late June, overtures to some form of reconciliation vs. confrontation were in evidence…and markets took their cue. All assets, but especially the two most important (bonds and stocks) rose in unison.
The Federal Reserve contributed to a perceived return to a risk-on environment. For a second time in less than six-months, the Fed shifted policy, in words and tone. Patience was absent in their June statement. But well before mid-month, in a speech, chair Powell made clear the committee’s focus was on sustaining the economic expansion. Markets’ reaction was swift, fully pricing a rate cut at the next meeting, and Treasury prices soared. The road had more bumps for equities, and not the smooth seemingly endless ride enjoyed by bonds.
So, at quarter-end, one pillar offers support, while U.S.-China trade talks remain unresolved. No escalation of tariffs is a relief but not a solution. The original set of tariffs now in-the-books for 12-months…with no end date in sight. No deadline, a negative. Recent clues appear more favorable, the easing of sanctions on Huawei is the most obvious sign. Talks are in round 12, at least. Will we receive a summer surprise? Possible but not likely, unless GDP drops near zero. For now, ‘consensus’ estimates for Q2 are running just below 2%.
Commodities marked a good quarter, gold especially so. The Midas metal rose to a six-year high, well above $1400 a Troy ounce. A combination of geopolitical risks – trade and Mideast – played a role. Crude oil was far more mixed: a bear market followed this year’s highest prices before soothing words on potential easing of interest rates and reduced trade tensions helped ease concerns of a further drop in consumer demand. With the summer driving season in full-swing, gasoline prices are a car-length away from last year’s prices and, most importantly, far away from $3 a gallon (an important threshold number in the past).
Finally, a few words on the greenback. The dollar lost value in June, in part due to a believe that lower short-term interest rates lie ahead, and renewed trade talks following a month without dialogue. Economic growth is beginning to weigh on the Dollar, growth differentials vs. global economies have contracted. Lower nominal rates along with lower ‘real’ rates are key factors.
Q3 2019: U.S.-CHINA TRADE TALKS, THE FEDERAL RESERVE’S JULY MEETING. YIELD CURVE. U.S. EQUITY MARKETS, VALUATIONS VS. EARNINGS. OVERSEAS: ALL-THINGS-EUROPE, WILL ECB ACT? EMERGING MARKETS, CRUDE OIL.