In this quarter’s economic and asset allocation views, we discuss the escalating trade dispute between the US and China as well as examining the factors likely to influence US Treasury yields in the next two years.
Chief Economist & Strategist
After a record-breaking 15 consecutive months of gains the S&P 500 became reacquainted with volatility in February and March to end the first quarter with a loss of 0.8%. More generally, developed market equities struggled as the key European and Japanese bourses also fell into the red during the period. Emerging market equities performed better with Russia and Brazil making healthy gains alongside rising commodity prices. The picture in bonds was more mixed with US Treasuries making losses, but European and emerging market sovereign bonds recording positive returns.
In many ways the return of equity market volatility is welcome after such a period of abnormal calm and in our view reflects the recognition that the world economy and hence monetary policy are normalising. The regional pattern of returns also owes something to the desynchronised nature of economic cycles and monetary policy, with Europe, Asia and emerging markets all lagging behind the US.
Having said that, all investors have been unsettled by the increasingly protectionist stance from President Trump and the risk that a trade war breaks out between the US and China. In this respect, we take a closer look at the likely response of China to US tariffs with all options, ranging from tariffs of their own to financial measures, on the table. Ultimately, we expect common sense to prevail and a trade war to be avoided, but the world has entered a difficult period where trade negotiations and hence politics will drive volatility (see Strategy note).
Coming back to normalisation, the other key question for investors is where are interest rates headed? Our research note looks at this from the perspective of US Treasury yields and considers the factors likely to influence yields over the next two years.
In addition to these issues, we include the usual update on asset allocation and our positioning across asset classes and within regions.
The full Global Market Perspective is available below.
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Global Market Perspective Q2 2018
25 pages | 905 kb