Investment Insights: Feeling the squeeze
This weekly report presents insights from our Global Investment Management team.
Stocks continue to recover from a distressing May on increasing dovishness from central bankers and signs of stimulus in China, but tariffs remain a mixed bag.
United Technologies and Raytheon have agreed to a merger valued at roughly $90 billion that will create the second-largest U.S. defense-aerospace company after Boeing.
Investors apparently aren’t thrilled with the prospect of the combined business as both companies faced notable losses yesterday.
However, markets are up and the S&P 500 has climbed almost 5% in the first week and a half of June. Stocks in the U.S. are leading the upturn, while foreign developed markets are up 4.2, according to MSCI data.
Bond yields are still having trouble finding direction as investors weigh troubling economic signals and the Federal Reserve’s recent attitude shift toward easing policy.
Central banks around the world seem to be in agreement that the global economy is showing signs of weakening. After Fed Chair Jerome Powell announced the U.S. was willing to cut rates if necessary, other officials have mirrored those dovish remarks. The Bank of Japan announced it could provide substantial monetary stimulus, and European Central Bank President Mario Draghi swore again to support growth in the region. Similar to his U.S. counterpart, following several months of consensus pointing toward a likely hike, Draghi now seems to be favoring looser policy after Germany reported a staggering drop in exports in April and 2019 GDP expectations were cut in half.
While central bankers focus on rates, officials in China may have the largest arsenal available to combat any potential slowdown. When asked by Bloomberg about the ongoing U.S.-China trade war, China’s central bank governor Yi Gang commented, “We have plenty of room in interest rates, we have plenty of room in required reserve ratio rate, and for the fiscal, monetary policy toolkit.” However, any possible talks could go either way. U.S. President Donald Trump announced that he would increase tariffs “much higher than 25%” if China’s President Xi Jinping does not meet with him at the G20 summit later this month.
While we see select positives in international trade, like Trump deciding to suspend the planned tariffs against Mexico, sizeable geopolitical risks from China and parts of Europe remain. That hasn’t stopped investor sentiment from rising and boosting financial markets. For now, our team remains cautious over the short term, but we are seeing encouraging developments. Globally, central banks are becoming more accommodative, and China looks willing to use its entire collection of policy tools to stave off a slowdown, both factors should provide some additional support for financial markets.
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