For the regular readers, you might remember the total excitement I had last May for an emergent video of the Loch Ness monster. As I enjoy a good conspiracy theory from time to time, mystery sightings of Nessie being reported by the news brings me endless amusement. So you might understand my enthusiasm for the latest development: an international team of scientists say they have identified four plausible theories for sightings of the legendary beast and will announce it next month!
While scientists chase mythical beasts, investors have been chasing a mythical US-China trade deal which despite renewed optimism from the US President at the G7 summit has failed to see any material positive developments. Asset class returns in sterling and local currency are below; equity markets rose in the final week of August following an action-packed month.
Table 1: GBP total returns
Table 2: Local CCY total returns
There is a common perception that while traders and investors across the Northern hemisphere head to the beaches for an August slowdown, markets trudge through the late summer heat with diminished volumes and volatility. If only it was so! While indeed August is statistically the month most traders go on holiday, news flow across the globe has been anything but stagnant. While further escalation between Washington and Beijing has seen a key US recession warning indicator – an inverted yield curve – begin to flash red, domestic politics continues to grip the national agendas of the UK and Hong Kong,. It should therefore be of little surprise given this spike in uncertainty that August has seen volatility once again come to the fore.
In a sign that economic uncertainty is taking its toll on global capital markets, a record $17 trillion of debt now trades with negative yield – in English, this means the owners of the bonds are guaranteed to lose money if they are held to maturity. Amazingly it isn’t just “risk-free” sovereign debt that has slipped into negative territory; close to $1 trillion of the debt pile is issued by riskier corporates. This extreme trend has been rapidly accelerating over the last year as skittish investors have either been attracted in the relative security of bonds versus stocks enough to actually lock in a negative return, or indeed have expectations that the economic environment will worsen whereby yields could sink further into negative territory. Pretty much all the negative yielding debt is in Euros. Negatively yielding bonds are still better stores of values then corporate cash accounts charging 50bps
Chart 1: The market value of negative yielding debt has sky rocketed over the last year as a worsening economic environment has led skittish investors panic buy bonds which are perceived as a less risky asset class
Tweets (and rhetoric) emerging from the White House continue to play a disproportionate role in driving the markets. For example, recent weeks have seen Mr Trump, a key critic of the US Federal Reserve Chairman Jerome Powell, quip “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?” This has added to pressure faced by the Fed’s chairman to aggressively reverse recent monetary policy decisions which sparked the sell-off in October and December last year. In the latest of these developments, the positive moves in equities last week came off the back of the US President once again toying with investor sentiment by stating that he thought the Chinese “really do want to make a deal”. Whether we will see any material positive developments is yet to be seen.
Chart 2: The S&P 500 has lacked any overall direction in recent weeks as recent news flow has oscillated from positive and negative
We anticipate that to break out of this trading range (signified by the blue dashed lines on the chart above), markets will need a development in the trade war to act as a catalyst. Which direction equities breakout, however, will be totally dependent on whether Washington and Beijing come to a material agreement. We wait with bated breath.
THE WEEK AHEAD (G7 + China)
Monday: Japan Jibun Bank Manufacturing PMI, China Caixin Manufacturing PMI, Italy Markit/ADACI Manufacturing PMI, France Markit Manufacturing PMI, Germany Markit Manufacturing PMI, Eurozone Markit Manufacturing PMI, UK Markit/CIPS Manufacturing PMI
Tuesday: UK Construction PMI, Canada Markit Manufacturing PMI, US Markit Manufacturing PMI, US ISM Manufacturing PMI
Wednesday: Japan Jibun Bank Services PMI, China Caixin Services PMI, Italy Markit/ADACI Services PMI, France Markit Services PMI, Germany Markit Services PMI, Eurozone Markit Services PMI, UK Markit/CIPS Services PMI, Eurozone Retail Sales, Canada Balance of Trade, US Balance of Trade
Thursday: Germany Factory Orders, Germany Construction PMI, US Markit Services PMI, US ISM Non-Manufacturing PMI
Friday: Germany Industrial Production, Eurozone Q2 GDP, Canada Unemployment Rate, US Unemployment Rate, US Non Farm Payrolls, US Average Earnings, Canada Ivey PMI
Saturday: China Foreign Exchange Reserves
STAT OF THE WEEK: 8.3 billion metric tonnes – estimated amount of plastic produced by human beings to date, equivalent to 25,000 times the mass of the Empire State Building (Science Advances).
Data correct as at: 30/08/19