Summary

• Equity markets recovered from fears of fully fledged global trade war as the political ramifications of higher tariffs point to some pragmatism around the issue.
• Most emerging market (EM) currencies and rates have recovered from worst levels, with the exception of Turkey where the US ramped up rhetoric around possible sanctions, and China, where the renminbi weakened a further 3%, bringing total move since mid-June to 6.5%.
• Commodity prices continued to fall, with the Commodity Research Bureau (CRB) Raw Industrials index down another 0.7% in the month, as shifts in global supply chains began to hit home.
• The CRB Raw Industrials index fell from its highest levels in the year to its lowest levels in the space of 2 weeks.
• Given the increasing signs of economic stresses, we maintained a slightly defensive positioning, continuing to shift away from EM debt exposure into developed markets (DM) sovereign, specifically cutting Mexico exposure after election results there.

Market update

June appeared to be “Peak Trade War” for equity markets, as July provided a relief rally from the negative sentiment on the expectations of a more pragmatic approach by the US.  It remains to be seen whether this does in fact transpire or whether Trump pushes ahead with some of his more extreme positions, especially with mid-term elections approaching in November.  Whilst the MSCI All Countries Index was up almost 3%, EM equities still underperformed the DM space, as markets still see some vulnerabilities in EM space going forward.

US Treasuries also gave up some of their safe-haven gains, with the 10-year Treasury backing up 10 points on the month, but still trading below the psychologically important 3% level.  Overall, sentiment towards fixed income remains on the negative side, with the FTSE World Govt Bond Index down another 0.4% during July.  EM fixed income saw EMBI spreads decline somewhat, although Turkey saw yields push further upwards as the US saw fit to apply sanctions.

On the Foreign Exchange (FX) side, China continued to allow the renminbi to weaken further, nullifying the impact of the trade tariffs imposed upon them by the US.  Whilst this may benefit exports, the Bank of China at some point will become concerned about inflationary impacts.

Not many new insights into central bank thinking, with the Federal Reserve (the Fed) undaunted by Donald Trump’s threats and communicating clearly that the up cycle is still in play, whilst the European Central Bank (ECB) also moves closer towards the end of the European Quantitative Easing (QE) programme.  In Japan, the Bank of Japan (BOJ) has failed to deliver the requisite growth and inflation trajectory, but in July it reiterated its support of its current programmes.  The biggest concerns may well be that the leading indicators are pointing to something of a GDP slowdown approaching, and whilst this will be of a high base, it will be concerning that apart from the Fed, the other major regions at this point are still reliant on a super easy monetary policy

Strategy

We reduced our equity risk in the previous month and kept the same approach into July, as we believe markets are trapped between rising risks and the current good earning growth path which sustains current valuations.  Whilst there is no clear signs of burgeoning inflationary pressures, markets remain sceptical of the ability of the bond market to retain current levels should both the Fed and the ECB continue to normalize policy over time.  We accordingly remain slightly underweight to neutral on duration terms.

Apart from a reduction in our Mexico position where we took some profits after the recent positive run, we are comfortable with current positioning, being slightly underweight equity and fixed income and overweight cash.