Given all the political unrest throughout the world and the American-led attack on the global trade status-quo it is surprising that equity markets have remained relatively calm. No doubt they anticipate further central bank easing, including the start of a downward leg in rates set by the US Federal Reserve and a fresh bout of quantitative easing. We don’t disagree – all of this is likely to occur, but it emphasizes the weak state of the global economy. Demand is sluggish and capital investment inadequate. Productivity growth is well below historic norms. Corporate earnings growth will undershoot market expectations, and this will eventually bite on equity valuations. Perhaps that is when the bond and equity markets will reach agreement.
Bond yields at the 10-year benchmark level are now, on average, at their lowest point in modern economic history. The movement in these markets is little short of astonishing. The market value of negative yielding bonds has now surged above US$11 trillion. Bond yields are so low they suggest the world economy must be in a state of collapse. Contrast the fixed interest markets to equities which have been strong over the last few years. The dichotomy is marked but it is difficult if not impossible for both markets to be right.
The major news during the quarter continued to centre on the trade dispute between the US and China. At the time of writing Mr Trump has deferred but not cancelled the latest round of tariff increases which would have impacted virtually all Chinese exports to the US. As things stand there is a 25% tariff on approximately US$200 billion of Chinese goods with a further US$300 billion (approx.) pending. The top three imports affected are telecommunications equipment, computer circuit boards and processing units.