The Multi-Asset Process

July 2018 Market Review

Over the last two years, it has rarely been possible to write one of these monthly updates without citing Brexit and President Trump as the key factors driving sentiment. And unfortunately – at least for those who yearn for a little variety – this remains the case for July.

Facebook has also seen its share of controversy this year and was back in the headlines as the company registered the largest one-day loss in US market history. A huge $119bn was lost as Facebook shares plummeted 19% on the back of disappointing results but this was not enough to dent a decent July overall for the S&P 500, as the index moved back towards all-time high territory.

On the Brexit front, the Prime Minister tried to set a course towards a softer exit from the EU next year, with her Chequers plan acknowledging we cannot feasibly start trade deals honed over decades from scratch. But this dose of reality was unwelcome for many seemingly more interested in personal profile than country and was left in tatters by the resignations of David Davis and Boris Johnson.

More than two years on from the vote, we look to be facing the very real prospect of a no deal Brexit and the Government is having to deny stockpiling food and medicines. Theresa May told MPs there would be around 70 "technical notices" sent to businesses and households over the next few weeks to explain what a no deal would look like in practice.

As we have continued to stress, the sooner we see some kind of clarity on this front the better: talk of a state of emergency is clearly no good for anyone.

Meanwhile, beyond his attempts to start a global trade war and an actual war with Iran, Trump also turned his ire towards the Federal Reserve in June, adding further uncertainty to markets. In historically rare criticism, Trump expressed frustration with the Fed and said its policy, with two rate hikes so far this year and another two expected before the end of 2018, could damage economic recovery.

While the President reaffirmed his faith in the “very good man” he chose as Fed Chair, Jerome Powell, he is clearly no fan of the normalisation policy and seems to have little care for how his comments might affect the market. Like it or not, it looks as though the Fed is becoming an increasingly politicised entity.

Trade war concerns have also continued to bubble in the background, with many commentators who suggested we would stop short of a full conflagration on this front looking less confident as the weeks pass.

European Commission president Jean-Claude Juncker visited the US in July in an attempt to diffuse tensions between the EU and US following tit-for-tat duties imposed in recent months. Hopes were not the highest, particularly with Trump tweeting "trade tariffs are the greatest" before the meeting, but officials appeared to strike a deal to work towards zero tariffs, barriers and subsidies. Both sides agreed there will be no escalation of the dispute for now and Trump and Juncker said they would resolve the steel and aluminium tariffs imposed by the US which started the dispute, although, like most of the remarks, this was short on detail.

All this came amid growing concerns about a trade war morphing into a currency war as Trump accused China and the EU of manipulating their currencies to gain a price advantage. The comments followed the renminbi hitting a 12-month low against the dollar, with the relationship between the currencies a major point of contention for more than a decade.

In response, Chinese officials said the country is simply doing what the US and IMF have urged for years, namely letting market forces guide the exchange rate.

As November’s US mid-term elections loom larger, we expect economic and political self-interest should alleviate this sabre rattling to some extent but markets will need to hold their nerve in the meantime.

July marked six years since European Central Bank president Mario Draghi’s ‘anything it takes’ speech and, after a strong 2017 for the Continent, growth has continued so far this year but at a slower pace.

Italian politics has clearly played its part and this looks set to remain the case as the new government appears keen to challenge the status quo on both fiscal policy and immigration. Importantly though – considering what the UK is going through with Brexit – they look keen to stay in the euro.

Despite these economic and political concerns, we believe a good deal of bad news has already been priced in, with lowered expectations easier to beat, and Europe remains among our favoured markets as we look to move away from the more expensive US.

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Wednesday, August 8, 2018, 11:04 AM