Capital Markets Update: June 2019

For professional advisers only. Not to be relied upon by retail investors.

Capital Markets Update


  • In a nutshell
  • Trade war tensions ease off
  • Central banks reinforce their dovishness
  • Economic data weakens


In a nutshell

Equity markets rallied in June, buoyed by a thawing of trade war tensions and further dovish noises from Central Banks. As yields fell, bonds performed strongly alongside equities. Investors appear to be looking through the current soft patch in data, as economic measures declined in June.

Trade war tensions ease off

Having escalated in May, Beijing and Washington’s trade tussle cooled in June. Trump tweeted that he and Chinese President Xi had a ‘very good’ phone call and that the two would have an ‘extended meeting’ at the G-20 summit. Then when the two met on 28th June, Trump told reporters that there would be a cease-fire on new tariffs for the ‘time being’ while negotiations continued. Trump also said that US companies would be able to resume selling supplies to Huawei. Investors breathed another sigh of relief at these developments, as it buys more time for both negotiating parties.

Whilst we are encouraged that trade tensions did not escalate further in June, we are mindful that a more permanent trade settlement could take considerable time, as issues like intellectual property will require a more complex solution. We therefore believe an element of caution is warranted on these developments.

Central banks reinforce their dovishness

Although the Federal Reserve held interest rates at their current levels in June, hints were given for a more accommodative policy going forwards. Chairman Jay Powell stressed the Fed’s commitment to supporting economic growth in the uncertain environment, commenting that the Fed was ready to ‘act as appropriate to sustain the expansion’. Powell’s comments sent bond yields falling, with markets now pricing in at least one interest rate cut this year. The ECB also struck a dovish tone in June, as Draghi commented that the central bank is prepared for fresh rate cuts and that the asset purchase program ‘still has considerable headroom’. Central banker comments sent yields in the developed world tumbling, creating an unusual environment where both equities and bonds performed well together.

We welcome central bank intervention to try to support the global economy, given the softness of economic data. Given our belief that we are late cycle, we think sovereign bonds are not cheap at this juncture and maintain a slight underweight, in favour of credit.

Economic data weakens

In June, US industrial output and capital expenditure continued to weaken, with trade war tariffs likely playing a role. The flash manufacturing purchasing managers index (PMI) released in June dropped to 50.1 from 50.5 in May, the worst reading since September 2009. The US durable goods orders and consumer confidence numbers fell short of expectations also. In the UK, the manufacturing PMI disappointed also, and retail sales undershot forecasts.

Multi manager team views

Although sentiment bounced in June, data releases reinforced concerns over the global economic outlook. We believe that an element of caution is still warranted on equity markets at this juncture. With regards to bonds, we maintain a preference for credit over sovereigns.

The current market volatility we are witnessing should create a favourable environment for active fund management, where adopting a diversified investment approach should be rewarded over time. We continue to look to manage our portfolios through the inevitable market ups and downs to deliver a smoother investment journey for our clients.


Important information:
For professional advisers only. Not to be relied upon by retail investors.
For professional advisers only. Not to be relied upon by retail investors. The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: July 2019. CAM008477.