U.S./China Trade - Where Are We Today?
Continued trade tensions drove elevated levels of market volatility throughout the month, as the U.S./China tariff exchange continued to unfold. Although we believe the trade overhang will slowly dissipate as we move through the year, any further escalations (real or implied) will continue to weigh on markets over the near term.
Oil Rises and Treasury Yields Push Higher; Flatter Yield Curve Debate
We are watching the yield curve, but it serves as only one input into our business cycle analysis. It is true that the curve has inverted before six of the last seven recessionary bear markets, but the lead time is often unpredictable. For example, the lead‑up was 21 months before the peak in 2007, but only 2 months in 1980. Currently, in combination with other economic signals, the yield curve is not yet a major concern.
Slowing Momentum, but Outlook Remains Positive; Brexit Still a Bit of a Sticky Wicket
Possibly due in part to the cooling economic data, European markets are struggling compared to their U.S. counterparts. During the first quarter, the S&P 500® lost only a little more than 1% while the STOXX® Euro 600 lost almost 5%. But markets advanced in April (the STOXX Euro 600 was up nearly 3% through the first three weeks of April) on comparatively strong earnings.
Bank of Japan Remains on Hold, for Now
We currently maintain currency hedges within some of our allocations to Japan and Europe. A combination of market positioning, such as record net-long euro futures positioning, rising U.S. interest rates, and diverging economic performances (such as data surprising indexes), seems to have encouraged the dollar’s recent advance, helping our hedged positions. Further supporting the dollar, the U.S. interest rate premium over Germany has never been higher, and the interest rate premium over Japanese government bonds may be enough to begin enticing Japanese asset managers to boost their unhedged U.S. bond allocations.
Emerging Market Stocks Under Pressure
In the near term, we would watch the underlying strength of the dollar. Since hitting its year-to-date low in mid-February, the U.S. Dollar Index is up about 3.4%. Emerging market (EM) countries running current account deficits, and any devaluation of their own currencies against the dollar, may increase their global borrowing costs and weigh down their economies. We have seen broad EM markets trade with moves in the dollar over the past few years, and may be seeing it again.
Crude at Its Highest Since 2014 on Tighter Supply Outlook
After a quarter-long consolidation, West Texas Intermediate crude oil prices broke above a key technical level of $66 per barrel in early April, the highest level since 2014, offering an indication the current uptrend remains intact.
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