• V-Shaped Reversal. Equites traded higher across the globe in June, recapturing most of their losses suffered just the month prior.  S. markets once again touched all-time highs amid rising prospects of a Federal Reserve rate cut, and hopes for a trade de-escalation between U.S. and China in the G20 meeting.

• Softening Fundamentals. Despite the positive market reversal, growth anxieties are on the rise both domestically and abroad.  Global manufacturing activity, in particular, has been weakening, and some forward-looking surveys are beginning to suggest actual contraction.  In the US, we are concerned about the continuing auto slowdown, and its knock-on effects within the broader economy.  The housing sector remains sluggish as well.

• The Fed Put. As a result of the growth concerns, the Federal Reserve is lowering its forward guidance, and indicated that the case for a rate cut has strengthened.  At present, market expectations embed a rate cut to take place in July, with overseas central banks likely to follow closely behind.  In addition, the Fed is scheduled to end its ongoing balance-sheet reduction in September, another indication the current tightening cycle is shifting course toward easing.

• Treasury Yields Decline. Alongside equities, the bond market moved higher too, as yields fell on the prospects of globally accommodative central banks.  The 10-year U.S. Treasury note yield fell to 2.0%, its lowest since 2016.  A low interest rate environment, by itself, should be a positive for the markets by lowering the cost of capital improvements by corporations, and providing less competition for investment dollars.

• Deal or No Deal. At the G-20 meeting in Osaka, President Trump agreed to delay any new tariffs on $300 billion worth of Chinese goods, and to restore the ability of US component suppliers to sell parts to the Chinese communications giant Huawei.  The moves should help to alleviate tension between the two nations, although the two sides remain quite far apart on critical trade and economic terms.

• Outlook for 2019. We are downgrading our outlook somewhat from our recent view.  While the recent deterioration in economic activity is a source of concern, the ongoing trade negotiations with China, Europe and Mexico will dictate market direction in the more intermediate term.  Though we believe the countries involved would want to avoid a man-made, self-inflicted economic stress, the situation is very fluid, and it remains to be seen whether a favorable trade deal can be negotiated.  In the meantime, with inflation pressures still subdued, we suspect that a Federal Reserve rate cut might happen sooner than most expect.

Christopher Lai

Senior Portfolio Manager

7/01/2019