Investment Insights: Lackluster trade fireworks

Wade Balliet
Posted by Wade Balliet
Investment Strategy

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

After all the excitement surrounding the trade meeting between U.S. President Donald Trump and Chinese President Xi Jinping over the weekend, the outcome seems to have fallen flat for investors.

On Friday, ahead of the summit, the S&P 500 leapt higher before paring gains on Monday as investors realized no long-term solution had been reached.

However, some positives did result from the conversation between the two heads of state.

Another temporary truce has been reached between the U.S. and China, which includes: no new tariffs; an easing of restrictions on Chinese tech company Huawei Technologies; a vague agreement by China to purchase U.S. farm products; and a commitment from both countries to resume formal trade talks.

However, the White House has switched its focus back to the EU and the long-running quarrel over aircraft subsidies. The U.S. Trade Representative released a list of European goods like Italian cheese and even Scotch whisky, which would add $4 billion to the existing list of possible tariffs on products valued at $21 billion.

Bonds point toward a bleaker economic future despite the stock markets’ relative optimism, with the S&P 500 reaching new all-time highs today and flirting with the 3,000 level. The 10-year Treasury yield continued its months-long downward trend dipping below the 2% mark again, and ending yesterday at 1.98%.

Treasury prices across varying maturities have climbed markedly over the last few months, sending a bearish signal along with the continued inversion in the yield curve. Bond investors are heeding those signals, but seem to be changing their point of view on interest rate cuts to align more closely with those of Federal Reserve officials. Fed funds futures data show the market has reined in expectations for rate cuts before the end of the year with a 0.50% reduction having the highest probability versus 0.75% a week ago. The data still show a 100% chance for a rate cut this month.

Our team continues to be cautious in our outlook for the financial markets. Geopolitical issues like the protests in Hong Kong, Brexit, the U.S.-China trade conflict, and other sanctions and trade-related concerns have the potential to drag on already fickle stock markets. While a rate cut from the Fed may help, bond markets are signaling rougher seas ahead and stocks could head into negative earnings growth this quarter. We are currently reviewing additional adjustments to our strategies and see increasing value from uncorrelated assets in the alternatives space.

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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.

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