Market Review 06/2019

After a fortuneless May, June turned out to be quite a successful month for the market. Mario Draghi’s nods on further stretching of his expansionary monetary policy through purchase of bonds accompanied with investors’ increasing confidence in interest rate cuts in US (although Mr. Powell and his colleagues still are, as they say, “data dependent”) not only were met with praise by Donald Trump but also by investors in general. Combine it with some constructive outcomes of G20 meetings and the result is a new ray of light for the markets.

Growth is slowing down in the US

Meanwhile, manufacturing sector in US expanded in June but at a slower pace. The Institute for Supply Management (ISM) said its index of national factory activity fell to 51.7 from 52.1 the month before. U.S. construction spending unexpectedly fell in May as investment in private construction projects dropped to its lowest level in nearly two and a half years. Weak construction spending was the latest indication that economic growth slowed in the second quarter after getting a temporary boost from exports and an accumulation of inventory. Consumer spending was rising moderately, while the pace of job and wage growth slowed.

Faced with greater downside risks to the economic outlook and falling long-term inflation expectations, the Fed backed up the dovish rhetoric, indicating that rate cuts might be warranted this year. The G20 meetings resulted in the US and China agreeing on no escalation in tariffs, yet no significant signs of progress in addressing key sticking points in their negotiations were presented. While the lack of further escalation avoids the worst-case scenario for now, the ongoing uncertainty and potential for a further breakdown in negotiations could continue to weigh on business sentiment.

Eurozone may need stimulus

Underlying inflation in Eurozone rebounded in June, offering some comfort to the European Central Bank but still falling short of the advancement policymakers are hoping for. With growth and price pressures easing throughout the year, ECB President Mario Draghi has already said that more policy easing will come in the near future unless inflation and growth prospects improve. Eurozone economic sentiment dropped to its lowest point in nearly three years in June as confidence fell markedly in the bloc’s largest economies, mostly in Germany and Italy. The main indicator fell to 103.3 points in June from 105.2 a month earlier, reaching its lowest level since August 2016, sending another stark warning over the health of the 19-country bloc’s economy.

Trade wars hit China

China’s factory activity shrank more than expected in June, an official manufacturing survey showed, highlighting the need for more economic stimulus as U.S. tariffs and weaker domestic demand ramped up pressure on new orders for goods. The weak manufacturing readings are likely to cast a shadow over the apparent progress U.S. and Chinese leaders made in Japan in restarting their troubled talks over tariffs amid a costly trade war. They will also spark concerns about stalling growth in China and the risk of a global recession. An official business survey showed activity in China’s services sector held firm in June despite growing pressure on the broader economy from U.S. trade measures. Beijing has been counting on a strong services sector to pick up the slack as it tries to shift the economy away from a dependence on heavy industry and manufacturing exports.

Reliance on Central Banks continue

We must say, there is an astonishing general reliance that the Fed (or any other Central Bank) will step in and “fix” the economy. It goes without saying that with such high hopes hanging on this one thing, there is ample room for disappointment. Still, equities and high-risk assets keep going higher. Tech companies, which suffered a fall in May, were one of the fastest growing sectors in June. Tesla, for example, gained 18% and recovered some of the losses for those who had been investing in Elon Musk’s project for the last two years. Of course, with every new electric car presented by Porsche, Jaguar, BMW, AUDI and others, Tesla’s chances for success become slimmer.

Oil rises; Gold is back to levels of 2013

After a US drone was shot down, the conflict between US and Iran escalated. In the short run, this incident, combined with OPEC threats of decreasing oil production and a drop in US oil reserves, resulted in oil and energy sector prices going up.

U.S. dollar fell in relation to other currencies and mainly in relation to gold. There has been a growth not only in gold prices, but also in miners. For example, Barrick Gold Corporation (with its ticker being symbolical GOLD:US) has gained 33% in value.

We were talking about “make-it-or-break-it” scenarios in precious metals during the last months and how tempting it was to be long in this asset class. Finally, levels of 1340-60 dollars per Troy ounce surrendered and we saw a fast move to 1435 in gold, which was the highest point since 2013(!). Now, is there a room to go even higher from here? As most of the time, the answer is “not necessarily”. It seems “safe-haven” demand might not come into terms with technical picture, which suggests that we might still be in a part of a bigger corrective pattern which started back in 2013. It appears that 1300 XAU/USD could be a strong support and 1260 point a «no-go» zone. New advances might take time now, so patience is a virtue one needs to possess.

Bond market rally is back

The bond market continued to rally in June, supported by falling benchmark yields and contracting risk premiums. The US Treasury 10-year notes yield 2%, meanwhile German yields are all negative, except for the 30-year bonds that offer a measly 0.25% yield. Super yields from “Super Mario” and a great “Thank You!” note from the Austrian Treasury, which tapped its 100-year bond issue at a great rate of 1.2%. A nice bargain indeed.