Global trade continued to be a challenge and a concern for markets, with many issues originating in May continuing to escalate in June. President Trump began the month with an acrimonious meeting with the G7, after he pulled the United States’ support of a common set of values. During the middle of the month, Trump imposed further tariffs on China announcing a 25% tax on a range of imported goods. This led to retaliatory tariffs from China, followed by another announcement for $200Bn of additional tariffs announced by the United States.
Despite trade friction, global equity markets managed to end the month flat (0.0%), while U.S. markets were slightly up (0.6%) and international-developed stock markets were slightly down (-0.3%). Following elevated levels seen in February 2018, equity volatility has fallen back to below-average levels. The VIX averaged 13.8 during June compared to its historical long-term average of 19.3. Emerging market countries took the brunt of the trade war news, ending June down 2.4%. Particularly affected were China and Brazil, both falling around 5% in local currency terms.
In bond markets, the U.S. Fed announced a rate hike of 25 basis points. This move was widely anticipated by global bond markets as indicated by minimal volatility following the June 13th announcement. Global bonds fell 0.4% and U.S. bonds were down 0.1% during the month. After reaching a 7-year high of 3.11% in May, U.S. 10-year treasury yields were range bound in June and finished the month lower at 2.86%.
Short-Term Market Outlook
Tactically, at the end of the month, we moderately favor stocks versus investment grade bonds. Two factors are in favor of equities – positive positioning of our leading indicator index and our view on relative valuation between the two assets. We have consistently seen stocks as more fairly valued than bonds, where we compare earnings yield to that of the U.S. 10-year treasury. Offsetting our preference for stocks was a pullback in leverage growth, which favors fixed income.
In turn, our leading indicator index was positive at the end of June, and this was largely driven by strong growth in our measurement of global trade activity. Other factors in the model, including change in jobless claims, manufacturing data, hours worked, and building permits had a negligible impact at the end of the month.
Our preference for international-developed stocks strengthened compared to the end of May. Stronger price growth in U.S. stock markets (momentum) favors that region, but this was offset by steeper yield curves and more favorable valuations in international equity markets. Steeper yield curves typically signal inflation and GDP growth, boding well for those country’s stock markets.
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Global Equities represented by the MSCI ACWI Gross Total Return Local Index; Emerging Market Equities represented by the MSCI EM Gross Total Return Local Index; International Equities represented by the MSCI Daily TR Gross EAFE USD Index; U.S. Equities represented by the S&P 500 Total Return Index; Japanese Equities represented by the MSCI Daily TR Gross Japan Local Index; Italy Equities represented by the MSCI Italy Index (MXIT index); Spain Equities represented by MSCI Spain Index (MXES Index); U.S. Dollar (USD)represented by the Bloomberg Dollar Spot Index; Global Fixed Income represented by the Bloomberg Barclays Global Agg Total Return Index Value Unhedged USD; U.S. Fixed Income represented by the Bloomberg Barclays U.S. Agg Total Return Index Value Unhedged USD; U.S. Treasuries represented by the Bloomberg Barclays U.S. Long Treasury USD.
QSCR 18185 (July 2018)