Investment Insights: Everything’s roses

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Suddenly, everything is seeming pretty peachy. Financial markets appear to be stabilizing as investors digest news concerning the U.S.-China trade war and monetary policy across the globe.

Bond investors are still seeing some turbulence ahead as yields continue to bounce around their lows; the 10-year Treasury yield approached the 2% mark again yesterday.

Meanwhile, stocks are showing resilience with the S&P 500 gaining almost 1% on Tuesday after both U.S. President Donald Trump and Chinese President Xi Jinping revealed they would hold an “extended meeting” at the G20 summit in Japan later this month to discuss trade.

The talks couldn’t come sooner as the trade war has not only caused unease for investors, but also added to mounting economic pressure on fiscal and monetary officials.

For the first time ever, the federal government spent over $3 trillion in the first eight months of the fiscal year, according to the U.S. Treasury Department, as outlay for military and social welfare programs increased. Meanwhile, deficits are also skyrocketing as the 2017 tax cuts drag on government revenue. Chinese tariffs have purportedly brought in billions for the federal government; however, a consensus of economists continue to say American companies and consumers are really the ones footing the bill.

Another trade dispute may be breaking out for the U.S. as India imposed retaliatory tariffs of 70% on a number of U.S. goods that went into effect over the weekend. The move comes after the White House chose to remove India from the list of countries that receive preferential access to the U.S. market under a 1974 trade program, and in response to the U.S. steel and aluminum tariffs levied last year. Based on U.S. government data, India traded goods and services worth around $142 billion in 2018 and was its ninth largest trading partner. That’s compared to China, the U.S.’s largest trading partner, which swapped goods and services worth $737 billion last year.

A bittersweet hopefulness seems to be percolating into stock markets after global central banks tweaked their rhetoric toward easing policy due to a worsening economic outlook and a distinct lack of inflation. The European Central Bank propped up stocks after President Mario Draghi specifically commented that the central bank was ready to reduce rates further “in the absence of any improvement,” and would resume quantitative easing if needed.

The announcement preceded the Fed’s meeting that concluded today and, as widely expected, officials kept rates steady. Chances of a rate cut jumped to 100% after the meeting and odds of a half-point cut versus the typical quarter-point move are increasing, according to fed funds futures data. When the Fed began easing in 2001 and 2007, it opted for a half-point cut both times.

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Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

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