Global stocks rose this week as the ping-pong game of sentiment around the trade conflict with China took a positive turn. Although new tariffs implemented by President Trump took effect, investors were encouraged by mutual agreement to renew high level talks. Reduced political tensions in Hong Kong and around Brexit also stoked enthusiasm. Friday’s jobs report was mildly disappointing but markets again took the glass half-full view and focused on increased odds of a Fed rate cut later this month.
S&P 500: 2,979 (+1.8%)
FTSE All-World ex-US (VEU): (+2.1%)
US 10 Year Treasury Yield: 1.55% (+0.5)
Gold: $1,506 (-1.1%)
EUR/USD: $1.103 (+0.
- Tuesday – The ISM manufacturing index signaled a contraction for the first time in three years.
- Wednesday – Hong Kong Chief Executive Carrie Lam withdrew the extradition bill which ignited mass protests.
- Wednesday – British lawmakers voted to require an extension if the government can’t agree to an EU exit by October 19. It also rejected Prime Minister Boris Johnson’s request for an October 15 snap election.
- Thursday – Stocks rose when China and US officials confirmed planned meetings on trade for early October.
- Friday – Fed Chairman Powell said the central bank will seek to sustain the expansion, suggesting another rate cut is in the cards later this month.
- Friday – The US economy added 130,000 jobs last month, somewhat below expectations but the official unemployment rate remained at 3.7%.
The dual storylines of trade and interest rates continue to dominate short term market direction. On the trade front, the last few months have proven that short term predictions about the trade conflict are nearly impossible to have confidence in. As time marches on and the 2020 election draws nearer, China will increasingly weigh the odds President Trump is reelected. Substantial motivation remains on both sides to reach some kind of agreement, but if nothing of substance happens in October we will be in a state where we may be stuck with current, and now substantial, tariffs in place for some time.
With a longer term view, companies are already adapting and current tariffs are likely already largely priced into capital markets. The same may not be true of interest rates, which are substantially lower across the globe than they were just a few months ago. Low and even negative rates have big implications for both borrowers and savers. We continue to stress the importance of a balanced view.
One perception is that lower rates are a signal of pending recession, but there is little hard evidence of that. Meanwhile, lower rates do definitively make equities more attractive. A simple way to look at it is that the dividend yield on US stocks is now higher than even long dated Treasuries. Overseas the spread is much wider in most developed countries. This doesn’t mean stocks must go up, but unless earnings fall significantly, it is compelling.