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Market Update, Alan McIntosh

The second quarter closed on Friday (as far as financial markets are concerned) with share prices continuing their upward march. Optimism about a potential “cease fire” in the trade tensions between the US and China helped sentiment and indeed at the weekend, a rapprochement was announced. The talks are “back on track” according to President Trump, with no new tariffs being introduced. Needless to say, the first day of the new quarter has got off to a good start.

Looking at the last six months, we have seen a strong rise in stock markets. In fact the US market had its best first-half in over twenty years, with the FTSE North America Index rising by nearly 19%. Why is this, given the uncertain economic and political backdrop? The answer rests primarily with the change in policy language from the US Federal Reserve. Running into the end of 2018, the central bank was on a mission to raise interest rates, seemingly irrespective of changing economic circumstances. This all changed in January of this year. Jerome Powell, the Fed Chair, talked about being “patient” in terms of judging whether more interest rate rises were required to prevent inflation rising in an economy running at near full employment. At its last meeting in June, the Fed moderated its stance further, hinting that a rate cut was now a possibility, given downward risks to economic growth. Stock prices rose sharply as a result.  

So what about stock markets over the second half of the year?

After such a strong six months, it would be wrong to expect the same over the next six months. However, if a trade agreement is reached between the US and China that allows the existing tariffs to be removed, then that would certainly reduce the risk of an unwarranted economic downturn. Central bank policy remains accommodative at present, which helps stock markets, but further upward movement of share prices needs confirmation that company earnings growth has not stagnated. The Q2 results season, commencing in around three weeks’ time, will kick-start the next leg of the journey.  

 

Economic Update, Richard Carter

The US and China agreed a trade war truce at the G20 summit in Osaka, and this was probably about as good an outcome as we could hope for. There were some concessions from the US side on Huawei and the usual promises by the Chinese to buy lots of agricultural produce, but there is nothing to suggest a comprehensive deal is imminent. Both sides face significant domestic hurdles to making meaningful compromises, and the existing tariffs remain in place so the damage to the global economy is ongoing. 

In terms of the Fed, the bond market still expects a rate cut at the end of July but the trade ceasefire means a 0.25% move is likely and not 0.5%. Global economic data is likely to remain soft and we have had a number of disappointing manufacturing PMIs out over the last few days. The Chinese one remained at 49.4, the German one was revised down to 45.0 and the UK PMI fell to the lowest level in 6 years at 48.0. This week will see the release of the ISM and the nonfarm payrolls report, both of critical importance to the Fed.

On the political front, the campaign promises being made by Jeremy Hunt and Boris Johnson on spending and on Brexit are being taken with a shovel load of salt by gilt markets. The new PM is set to be announced on 23rd July and will take over after Theresa May does her final PMQs on the 24th July. Their honeymoon is likely to be short with a by-election taking place a week later in Wales with the Tory majority expected to be reduced even further. Major political battles lie ahead after the summer recess.

Investors should remember that the value of investments, and the income from them, can go down as well as up. You may not recover what you invest. This commentary has been produced for information purposes only and isn’t intended to constitute financial advice; investments referred to may not be suitable for all recipients. Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.

Source - Quilter Cheviot Weekly Comment 2/7/19