Global Markets Remain Volatile
Donald Trump’s sudden escalations of trade tensions with China have rattled global markets, triggering a sell-off in equities and a flight to government debt, even as the latest US jobs data offered reassurance about the US economy.
The slide in leading equity indices was driven by the US president’s announcement last week that he would slap 10 per cent tariffs on a further $300bn of Chinese goods in early September.Beijing vowed to retaliate with “necessary countermeaures” dimming the prospects for free global trade.
In a bid to shield the US expansion from commercial tensions and evidence of a deepening global economic slowdown outside the US, the US Federal Reserve (Central Bank) cut is main ‘Fed Funds’ rate by 25 basis points (0.25%) for the first time since 2008.
With investors worried about the outlook for global growth they have sought the safety of bonds.US Treasury bonds experienced their biggest weekly rally since 2014, pushing the benchmark 10-year yield down by 20 basis points over five days (Yield-to-Maturity=1.70%). US 10-year yields have fallen significantly from the 3.25% seen at the very beginning of 2019 when it looked like US interest rates were going to rise due to strong US growth.Remember yields down means bond prices up, so holders of bonds have made a lot of money in 2019!
Outside the US, the yield on 30-year German Government bonds plummeted into negative territory for the first time in history, briefly pushing the country’s entire government bond market below zero per cent, meaning investors seeking safety were prepared to face a guaranteed loss when holding debt to maturity.
The UK 10-year Government bond (GILT) is also yielding a record low of 0.50% YTM.
With US interest rates being cut you would expect the US Dollar to weaken, however the Dollar remains relatively strong as, from a global growth perspective, the US economy represents the “cleanest dirty shirt around” i.e. non-US economies are weak vs. US.
The British Pound has weakened significantly over the last few weeks as the prospect of a ‘no-deal’ Brexit has increased with the election of Boris Johnson.
Gold is also a ‘safe haven’ asset so in demand right now trading at $1500 per ounce – a 6-year high.
Oil – at $58 dollars per barrel is showing weakness anticipating a slower global economy.
S&P 500: 2930
FTSE 100: 7400
Bonds – 10 Year Government Yields
EUR/USD 1.1200 (1 euro buys 1.1200 dollars)
GBP/USD 1.2100 (1 pound buys 1.2100 dollars)
OIL: Brent: 58.00 (dollars per barrel)
GOLD: 1500 (dollars per ounce)
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