This weekly report presents insights from our Global Investment Management team.
When looking out at the agenda of events this week, one could only imagine a more jam-packed docket of potential market-moving events in just one day.
As investors grab their second morning coffee Thursday, or perhaps a cup of Earl Grey, the results of Britain’s snap election will be percolating through the markets. Theresa May seeks to garner additional parliamentary seats in hopes of further unifying the country ahead of the upcoming Brexit negotiations. The polls currently indicate that the election should be a non-event with May and the Conservatives up by at least 5 points in most major surveys. However, after a back-and-forth with the Trump administration on how London Mayor Sadiq Khan responded to the recent terror attacks, many Brits hoped that May would send a message sternly defending Khan against Trump’s tweets. May’s retort seems to have fallen short for some and has brought the outcome of the election into question or at the very least a closer race.
Thursday will also be the day for an important policy announcement from the European Central Bank (ECB). Once again, this may be much ado about nothing as the ECB isn’t projected to change much in terms of monetary policy with only a slight modification to the central bank’s rhetoric which mentions “downside” risks to growth. Investors are mainly looking to see if policymakers feel strongly enough about the current state of economic growth to remove this verbiage. In response to the upcoming uncertainty for these two mostly unrelated but parallel events, the STOXX Europe 600 Index (which tracks the prices of European equities) slid approximately 0.67% on Tuesday but is up more than 18% in USD terms for the year, making it one of the best asset class performers within global equities.
Traversing across the pond, Thursday also brings the much anticipated testimony of former United States FBI Director James Comey. While the testimony likely won’t have a direct impact on financial markets, it could spark worry over the current administration and their relationships, past and present, with Russian officials. Depending on the details that Comey releases, market participants may start to trade on the potential for further shake-ups within the government. To add some fuel to the potential fire, the testimony will occur just before the Federal Reserve’s June meeting next week, where markets expect a second hike for this year; implied futures probabilities aggregated by Bloomberg show a 97.8% chance of an increase. Currently, the Global Investment Management team agrees with the broad market and believes that even with the aforementioned concerns, the Fed has seen enough data and positive trends in economic fundamentals to raise rates another quarter point.
This doesn’t mean that the market isn’t wary. When looking through traditional safe-haven assets, the 10-year treasury rate is now at lows not seen since the run-up to the U.S. presidential election with the rate closing at 2.15% yesterday. Gold also rallied Tuesday with spot prices up over 1% and now at a 7-month high. Even sovereign bonds in France, Germany, and the U.K. saw upticks to prices as cautionary investors sought to buy risk dampening asset classes across the globe. At its surface, this may seem alarming, but we expect most of these concerns to occur without incident. The highest cause for pause might end up being the Comey testimony. There simply isn’t a way to gauge the outcome or the remarks the former FBI director will make, unlike the history of the rhetoric and movements of the ECB and the story the polls are telling the world about the outcome of the British elections. The Global Investment Management team will be keeping a keen eye on Thursday’s news cycle with particular attention to the Congressional testimony and the anticipated live Tweets from the White House. This will most likely be a distraction rather than a disruption of fundamental economic data.
Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
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