2 July 2019 Issue 815
Global Market Commentary
- US: There is new problem found on 737 MAX passenger aircraft, which dragging down the Boeing price as well as the US stock market. Over the week, the Dow fell by 0.45% to 26,599.96. The S&P 500 index fell by 0.29% to 2,941.76. The Nasdaq fell by 0.32% to 8,006.24.
- Europe: China and the United States agreed to resume trade negotiations and the trade war was eased. Moreover, the United States agreed to ease sanctions against Huawei. Over the week, the UK’s FTSE 100 index rose by 0.24%, the German DAX index rose by 0.48%, and the French CAC40 index rose by 0.19%. The STOXX 600 index rose by 0.03% for the week to 384.87 points.
- Asia: Chinese president Xi Jinping and US president Trump agreed to resume trade negotiations after the G20 Summit. Moreover, Trump announced that a new round of trade negotiation has begun, which gives an optimistic signal to the market. Over the week, the Nikkei 225 index rose by 0.08% to 21,275.92 points. The MSCI Asia Pacific Index rose by 0.51% to 160.05 points.
- US: The Fed abandoned to use “keep patience” in the statement of the meeting, which raised market expectations on interest rate cuts. Moreover, China and the United States agreed to restart trade negotiations, easing the tension between China and the US, funds flow from bond markets into stock markets. For the whole week, the US 10-year bond yield fell by 5 basis points to 2.014%.
- Europe: The inflation rate of Germany in June is still far below the target that set by the European Central Bank (ECB), the market worried that it will enter into a recession cycle. For the whole week, the German 10-year bond yield fell by 4 basis points to -0.329%.
- Oil: The Oil Group agreed to extend the production reduction agreement for 9 months and fully supported the formal alliance between the Oil Group and the non-oil group oil producing countries, driving up the oil prices. Over the week, New York oil futures rose by 1.81% to close at $58.47 a barrel.
- US dollar: The Fed abandoned the wording of “keep patience” in the statement of the meeting, which boosts the interest rate cut expectations, dragging down the US Dollar Index. For the entire week, the US Dollar Index fell by 0.094% to 96.130.
- China: China and the United States agreed to restart trade negotiations, easing the tension between the two countries. The United States also agreed to ease sanctions against Huawei, which benefits the yuan. For the whole week, the yuan rose by 0.087% against the US dollar to 6.869.
- US: Trump said that a new round of trade negotiations between China and the United States begun, and the relevant personnel have conducted a lot of communication through telephone, which was actually started before the meeting of the presidents.
- US: The US Trade Representative proposed to impose tariffs on $4 billion worth EU goods and proposed a supplementary list of 89 “tariff items” that could be subject to tariffs.
- U.S: The US ISM manufacturing index fell to 51.7 in June, falling for three consecutive months, the lowest since October 2016, but it is still above the economist’s median forecast of 51.
- Euro-zone: The new chief economist of the European Central Bank said that there is still room for policy expansion if necessary. He also claimed that ECB’s long-term bank loans and a communication strategy provide complementary support to the economy.
- Euro-zone: There is still no sufficient consensus between the EU leaders on the nomination of Frans Timmermans from the Netherlands as chairman of the European Commission. New consultations will continue on Tuesday.
- Euro-zone: Italy lowered its 2019 deficit rate target to 2% in order to comply with EU’s rules and avoid being punished for failing to control debt level.
- Japan: The compensation disputes over forced labor in World War II between Japan and Korea has escalated. Japan plans to impose export restrictions on some highly specialized products that needed to manufacture semiconductors and computer monitors from Thursday. Moreover, Japan also considers to remove South Korea from its exports’ whitelist. Besides, South Korea said it will file a lawsuit against the Japanese export restrictions at the WTO.
- Japan: According to data from the Bank of Japan, the growth rate of Japan’s Corporate Service Price Index unexpectedly slowed to 0.8% year-on-year in May, hit one year low, and it is also lower than the market expectation of 1% growth.
- South Korea: The South Korean Bureau of Statistics announced that South Korea’s consumer price index (CPI) rose by 0.7% in June, less than the market expectation of 1%.
|China Market Commentary|
|• China’s central bank governor Yi Gang said that the progress of the meeting in G-20 summit between China and the US were better than expected, but he will remain cautious in the future because the views of China and US on the structural and fundamental issues are still distinct.
• The State Council of China has requested to reduce the actual interest rate of financing for small and micro enterprises, and the pilot deployment supports the expansion of intellectual property rights pledge financing and manufacturing credit , which may strengthen the protection and utilization of intellectual property rights and promote employment expansion.
Financial markets recorded strong gains in the first half of the year
The result of the G20 summit on the weekend was to ease the tension of market sentiment, and the financial market also perform well in the first half. The meeting between Trump and Xi Jinping restarted Sino-US trade negotiations and relaxed sanctions against Huawei, which exceeded market expectations. The financial market recorded a strong increase in the first half of the year, and the result also stemmed from the good news of Sino-US trade negotiations.
Reversing the decline of 2018
In the first half of 2019, the market-cap of the stock market rose by more than 8 trillion, and the MSCI World Index was incresing close to 15%, which was the biggest increase since the 1997 dot.com bubble. The increase has also spread to major regions of the world. Despite the corrections in various parts of the country in May, the US, European and Chinese stock markets recorded increases of 18%, 13% and 20% respectively.
Other major assets also have good performance. Crude oil recorded a close to 25% increase in the first quarter, the largest increase in the first quarter since 2009, and also helped the Russian Ruble to become the top of the currency rise list. Traditional high-yield assets such as high-yield bonds and emerging-end local currency bonds also recorded impressive results, with an increase of about 8% to 9% respectively.
The asset price in the first half of 2019 is like the mirror in 2018. What changed the trend of last year? One of them is China’s policy direction. China not only slowed down the process of de-leveraging, but also launched a series of fiscal stimulus measures of up to 14 trillion to stimulate the economy. On the other hand, the Fed has also changed the direction of monetary policy. During the year, we may see a rate cut since the financial tsunami.
Money flows into safe-haven assets
The 10-year US Treasury yield has fallen nearly 70 points year-to-date, which means an increase of about 7%. This is the third consecutive quarter of declines since the last quarter of 2018 recorded an increase in five consecutive quarters. European safe-haven assets are also favoured by funds. Germany’s 10-year government bond recorded a 5.5% increase, and the market expects the European Central Bank to follow the Fed’s direction to reverse monetary policy. Treasury yields fell again to negative area, which happened again after a record low in March 2016.
The safe-haven gold price also rose above the 1,400 US dollar, a six-year high. Not only has traditional hedge assets recorded an increase, but cryptocurrencies have also been re-live. The low interest rate policy, which has been going on for many years, and the record number of negative interest rate bonds have led investors to question the prospects of monetary policy. Money began to diversify into different safe-haven assets. Among them, Bitcoin rose more than 220% in the first half of 2019.
Growth expectations are key factors in the second half of the year
When the central bank tries to extend the current economic cycle, growth expectations determine the relative attractiveness of risky assets and safe-haven assets. The market decline in May warned investors that low interest rate policy is not a panacea, and a slowdown in growth will lead to a correction in the stock market. Investors should pay attention to local PMI indicators and analyse the economic growth prospects of different regions.
We believe that the economy will not experience a recession risk during the year, and the US PMI should remain above 50, but below 53. According to the Faceset research, when the PMI is in this range, the S&P 500 index earnings per share increase is about 3%. As of June 28, the profitability of the S&P 500 index business has been revised down to 4.4% in 2019, and there is limited space for earnings revised. However, corporate earnings growth in 2020 is still more than 10%, which means that unless the economy significantly exceeds expectations, corporate earnings will drag down the performance of the stock market. Valuation is an important factor in determining the return on risk assets of investors.