What is the US equity market telling us?
US equity markets hit a record high recently, amid renewed optimism over a trade truce between the US and China and continued expectations for Federal Reserve rate cuts. With growth close to trend, inflation low, and monetary policy supportive, equity markets appear to believe this Goldilocks scenario will continue. We remain overweight equities, but we also position to protect against a breakdown in trade talks and other downside risks.
What is the US bond market telling us?
The US bond market seems to be pointing to weaker growth. But there is little sign of a sharp slowdown: US growth is close to trend, inflation is low and monetary policy is accommodative. It makes more sense that the bond market is pricing pre-emptive Fed rate cuts. While the decision is finely balanced, we expect the Fed to cut rates at its July meeting. The risk remains that the Fed disappoints market expectation for more than 100bps of cuts by the end of 2020.
Can the US-China trade truce lead to a deal?
The meeting between Presidents Donald Trump and Xi Jinping at the G20 succeeded in averting a breakdown of talks, while failing to produce a breakthrough to reduce tariffs. The most likely outcome is a prolonged truce on trade, with neither an escalation nor a removal of tariffs. But neither side appears in a rush for a deal. Both Presidents Trump and Xi appear to be calculating that they have strong cards to play. Investors should remain braced for a bumpy ride towards a more conclusive deal.
What’s next for Brexit?
Boris Johnson, the former Foreign Secretary and leading advocate of Brexit in the 2016 referendum campaign, has emerged as the frontrunner to become the next British prime minister. Johnson has said he favors leaving the EU on 31 October, with or without a deal. Whatever the outcome of the leadership contest, the next PM could continue to face a political impasse. We now see a rising chance that the UK will be compelled to ask the EU for a third delay to Brexit. This would, in turn, raise the probability of a snap general election or second Brexit referendum.
How can entrepreneurs diversify their wealth?
Entrepreneurs typically have much of their wealth tied up in their businesses. This concentration of capital can generate significant returns. But concentration can also reduce liquidity to finance spending needs, and lead to over exposure to a single country, currency, and asset class. Diversification can mitigate these risks and give entrepreneurs access to new sources of returns.
Knowledge is power
Subscribe to the Weekly round-up newsletter to receive top CIO content directly in your inbox