Tepid summer CPI

Markets

• Global equity market returns were positive in GBP terms across all regions, aside from Emerging Markets which fell -0.18%. US equities fared best (+3.13%), followed by Europe (+2.87%), the UK (+2.23%) and Japan (+0.61%).
• Bonds rallied as UK gilts rose +1.12%, and UK corporate bonds rose +0.97%. European government bonds gained +1.26% in local terms, whilst US government bonds rose +0.28%.
• GBP appreciated +0.86% vs USD and +0.74% vs JPY, but depreciated -0.62% vs EUR.
• In USD terms, the oil price rose +0.92%, while gold rose +3.48%.

Macro

• Headline Consumer Price Index (“CPI”) inflation in the Eurozone cooled to 1.2% in May, from 1.7% in April. Despite respectable Q1 GDP of 0.4%, supported by domestic demand and the fading drag of emissions regulations, the ECB cut growth forecasts. The ECB extended forward guidance on rates, indicating key interest rates would be on hold into 2020. Furthermore, the ECB mentioned the possibility of further rate cuts and restarting its quantitative easing programme if necessary. Markets will be encouraged that the ECB is willing to provide support, though global trade frictions and political challenges mean that risks remain.
• The latest US jobs report revealed non-farm payrolls rose by 75k, well below the consensus of 175k. Average hourly earnings growth softened too, slowing to 3.1%, and unemployment held steady at 3.6%. US equities responded positively, as the weak data points further reduce the pressure on the Fed to tighten rates. However, with the market now pricing in a 90% chance of a rate cut in July, and a further two rate cuts in 2019, there remains a risk that the market does not see as much easing as it anticipates.
• The most recent Caixin PMIs revealed a mixed bag of results for China. The services measure declined to 52.7 from 54.5, reflecting service providers’ weak confidence. Manufacturing was a small bright spot, with the PMI rising to 50.2 from 50 amidst rising trade tensions between the US and China. In addition, Chinese policy makers announced further infrastructure investment on Monday in an effort to counter on-going trade tariffs, which are likely to weigh on Chinese growth.

Our view

• Global growth has weakened somewhat, but Chinese stimulus, and accommodative monetary policy lead us to expect it to remain positive.
• While geopolitical risk remains elevated, we believe this remains an environment favouring equities over bonds.
• Within our regional equity allocation, we favour those regions most attractively positioned to benefit from the improvement in the global growth dynamic.

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The information contained in this article is believed to be correct but cannot be guaranteed. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Opinions constitute our judgment as at the date shown and are subject to change without notice. This article is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third party websites are provided, Close Brothers Asset Management accepts no responsibility for the content of such websites nor the services, products or items offered through such websites. CBAM5687.