Market sentiment shifted this week, as investors moved towards a more risk-on stance on the back of trade optimism and ahead of key central bank decisions over the coming weeks. Over the week, equity markets gained while bond markets declined, with performance suffering as a result of the high bond exposure within the portfolios. After months of outperformance owing to the spreading of risk-off sentiment amid recessionary concerns and deteriorating economic data, this week’s decline in bond markets was predominantly caused by a reduction in expectations for central bank easing, most notably the potential for a new QE programme which was originally expected to be announced by the European Central Bank in tomorrow’s rate decision announcement.
Despite the near-term challenges caused by this week’s sell off in bond markets, the data suggests that this is a temporary shift, as market participants take profit on their bond positions ahead of the European Central Bank decision tomorrow, while also allowing bond markets to rebase their forecasts after getting ahead of themselves on rate cut optimism. It remains our view that bond markets will continue to rally as the economic data continues to deteriorate, prompting a sell off in equity markets and continuing the risk-off trend seen so far this quarter.
For further information on the recent movements in bond markets, please see the attached Market Update document.
Away from bond markets, the Brexit saga rumbled on this week as MPs passed legislation to block a no-deal exit on 31st October, while also voting against Boris Johnson’s calls for a General Election. With parliament now prorogued until the 14th October, the Prime Minister must use this time to meet with the EU to agree a Brexit deal or ask for a further extension to Article 50, despite recently being quoted as saying he would ‘rather be dead in a ditch than delay Brexit’. UK markets and the pound are likely to remain volatile in the meantime, with the pound appreciating to $1.23 on reduced expectations for a no-deal Brexit from a low of $1.19 over the week. As a result, we continue to mitigate currency risk within the portfolio, as a sharp appreciation in the sterling threatens non-hedged overseas investment returns should a deal be reached.
In the US, despite weaker jobs data indicating potential weakness ahead for the consumer, equity market movements over the week were mixed on trade optimism ahead of the resumption of face-to-face US-China trade talks next month. This morning, Beijing announced it would exempt 16 categories of products from US trade tariffs, indicating progress in talks, however kept pressure on farmers by refusing to remove tariffs on pork or soybeans. Stocks also remained optimistic ahead of the ECB decision on Thursday ahead of its own Fed rate decision on the 18th of this month.
Key events this week:
• Thursday: Eurozone Industrial Production for July, the ECB rate decision on an expected stimulus package
• Friday: US retail sales for August
For anyone who wants further data to substantiate the position please review the attached Global Economic News Document and the economic data set also attached.
Model Portfolios & Indices
Over the week, global equity markets gained on trade optimism amid rising downside risks in the global economy. Markets remained highly volatile over the week as recessionary concerns remain, with investors focusing on trade and central bank developments as the data continues to disappoint.
Safe haven assets such as gold sold off over the week alongside bonds, owing to the temporary spreading of risk-on sentiment throughout markets. Equity markets gained over the week overall, however the intraday movements reflected the lack of direction as equity investors grapple with recessionary fears, with movements indicating that the sell off in bond markets was primarily a profit taking exercise rather than a full risk-on rotation. It is clear that geopolitical tensions remain, and the economic data continues to illustrate weakness in the global economy, with risks now tilted towards the downside. The OBI portfolios remain defensively positioned with limited equity exposure and a downward tilt which seeks to benefit when equities decline, and our portfolios remain well positioned given current conditions, despite this week’s bond market sell off. The portfolios declined over the week as a result of the bond exposure, however due to the reasons outlined in the Market Update document, we see this as a temporary factor which we expect to recover in the coming weeks. The benchmarks also suffered as a result of their bond exposure over the week.
As we progress from here, it is important to recognise that we should not let benchmark performance make us feel like we have missed out on anything, because although we have in the short term, recent performance shows how quickly this can be reversed given current levels of risk and uncertainty.
Overall, it is our view that equity markets will continue to decline before adjusting to the new norm based on lower global growth and weaker corporate profitability. The key point here is to take a long-term view, look at the current level of uncertainty in the global economy, and remember that the portfolio is designed to minimise your exposure to risk and preserve capital. Markets are behaving irrationally, therefore the most sensible strategy is a defensive one given current market conditions.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested.
Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1895, the prestigious FA Cup trophy was stolen from football outfitters William Shillock of Birmingham. 68 years later, an 83 year old man confessed he’d melted it down to make counterfeit halfcrown coins!
Have a great week
Jason & Gina