Key Market/Economic Observations

United States
Dovish Fed Pulls S&P 500® to New High; Economic Expansion Turns 10

Domestic equities rallied throughout the month after the Federal Reserve’s (Fed’s) dovish pivot. Markets likely responded to the Fed’s growing readiness to lower rates for the first time in more than a decade which were brought about by uncertainties in the economic outlook due to trade tensions and persistently low inflation. The markets’ reaction reflected how investors remain increasingly sensitive to trade and central bank policy as they navigate the later stages of the business cycle. Overall, the S&P 500 is on pace for its best first half since 1997, up over 18.5% as of June 26 after setting a new high of 2,954 on June 20.

International Developed Markets
Global Monetary Policy Pivot Underscores Tug-of-War between Escalating Macro Concerns and Solid Fundamentals

Over just the past six months, many of the world’s major central banks have signaled not only an end to the global rate-hiking cycle, but a shift back toward accommodative policy. The Fed, European Central Bank, and Bank of Japan all lowered their forecasts for economic growth and monetary policy alongside heightened uncertainty. In our view, this apparent shift toward forecast dependence rather than data dependence underscores just how much headline macro concerns have weighed on sentiment, even when the hard data do not yet seem to reflect a material deterioration in the fundamental backdrop. 

Emerging Markets
Hong Kong Extradition Bill Protests Overshadowed by Strong Emerging Markets Performance

After a challenging May, the MSCI Emerging Markets Index is having its second best month of the year, up 5.5% heading into the last week of June. Most of that return was generated in the latter half of the month, likely due to easing global trade and tariff talks, the Fed signaling a willingness to provide further accommodative monetary policy, and a weakening dollar.

Commodities
Crude Oil and Precious Metals Gain on Increased Risks

The Bloomberg Commodity index gained over 2% in June after retesting a key support level early in the month, which it last tested in December 2018, and maintaining positive returns year to date. However, the drivers behind the rally may be less emblematic of risk-on sentiment than headline returns suggest. Precious metals led gains, with gold rising over 7% amid increased trade tensions and the prospect of a shift toward monetary accommodation. Crude oil rose more than 5% after Iran struck down a U.S. drone flying in international airspace, helping boost the geopolitical risk premium associated with potential supply disruptions. Demand expectations remain a focal point for macro-sensitive industrial metals and energy commodities given slowing global growth, which we expect to weigh on commodity prices until growth expectations stabilize. Inflation expectations reflect this dynamic, falling to 1.73%, well below the Fed’s target rate of 2.0%.

Strategy Views
A Decade after First Bitcoin, Facebook Joins Cryptocurrency Race

A little more than 10 years ago, Bitcoin created the world’s first digital, nongovernment-backed cryptocurrency. Fast forward to today: more than 2,200 different crytocurrencies are vying to unseat government-backed/fiat currencies like the dollar or the euro. While the public is much further along the crypto learning curve today, the same the fundamental issues that have inhibited Bitcoin from attaining mainstream adoption more than 10 years ago remain unsolved. Specifically, Bitcoin, or any other digital currency, has not yet proven the ability to function as either a stable holder of value or an easy-to-use medium of exchange. Without resolving these core deficiencies, it is unlikely any cryptocurrency in its current form will gain world adoption. These challenges have set the stage for the latest development in crypto assets from a somewhat unlikely source: Facebook. In a much-anticipated announcement the social media giant, which connects over 2.4 billion people across the world every day, released details of its own cryptocurrency called Libra. Libra offers a new take on cryptocurrency in an attempt to fill the gaps of crypto assets before it. Perhaps the most unique difference between Libra and Bitcoin, is the new currency will be backed by a pool of low-risk assets and currencies in an effort to maintain a stable value. This month, we examine the structure of the currency, as well as its governing body, and offer our view on where we believe this latest innovation will have the largest impact on financial markets.

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