7/3/2018

 

Highlights:

  • The 2nd quarter of 2018 saw global equity markets lose some ground from the first quarter, much of it attributed to the growing trade war dispute that is taking shape between the U.S. and the rest of the world. In June, MSCI All-Country World Index lost 0.54% but still ended the quarter with a slight gain of 0.53%, much of the gains coming from the U.S. market. 
  • Based on regional equity market and currency performance, the U.S. appears to come out on top of the trade dispute so far with the S&P 500 gaining 3.4% for the quarter versus 1.3% loss for MSCI Europe, 2.8% loss for MSCI Japan, and 8.0% loss for MSCI Emerging Markets.
  • The trade-weighted dollar also gained 4.9% for the quarter and is now up 6.6% from its lows reached earlier in the year.
  • Led by oil prices (1-month generic rallying to $74/barrel), commodities generated another strong quarter and are one of the best performing asset classes this year. Oil prices rallied due to supply concerns stemming from Libya (dispute over oil-marketing rights) and Iran (sanctions-related) as well as major oil producers, Saudi Arabia and Russia, agreeing to raise output ‘less aggressively’ than what was anticipated. 
  • In a somewhat contradictory fashion, defensive, rate-sensitive sectors such as REITs and utilities also performed well. Much of this rally occurred late in the quarter as investors moved to more defensive positioning considering the elevated trade war rhetoric and retaliatory tariffs. 
  • Global trade ‘dispute’ becoming a greater reality for investors. Of the worldwide tariffs announced so far between the U.S. and her trading partners, the Tax Foundation estimates that long-term U.S. GDP would decline 0.44% along with negative impact on wages and employment.
  • Much of the uncertainty surrounding the trade disputes is starting to impact investor risk appetite although narrow below-investment grade credit spreads and rallying oil prices are giving a lifeline to late stage cyclical reflation. A broader concern is whether market uncertainty surrounding trade will spill over into global business sentiment with respect to capital spending plans. 
  • Diverging monetary policies between the U.S. (rate tightening) versus the rest of the world (Japan and Europe remain in quantitative easing mode) has caused concerns that the rest of the world will not be equipped to shoulder the higher interest rate burdens and reduced dollar liquidity from U.S. Fed tightening, especially for foreign borrowers that have issued dollar-denominated debt. 
  • Is the Trump ‘trade dispute’ enough to push key macro and market risk indicators into deflationary territory? We may get a glimpse over the summer, but investors should keep an eye on the term structure and credit spreads as early clues that the U.S. economy may slow down enough for the Powell Fed to hit the pause button on the rate hike schedule.
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