Markets await further news to provide direction

It has been a mixed week for markets, whilst investors wait for further news to provide direction.  The first week of second quarter company earnings season has provided mixed results, but it is too early to draw any conclusion as to whether an economic slowdown is evident.  President Trump lowered expectations of an impending trade deal with China, as he warned that a trade deal is still a long way off.  On Thursday, following an announcement that the Iranian Revolutionary Guard had seized a foreign vessel, came the news that the US Naval ship, USS Boxer, had been forced to shoot down an Iranian drone over the Straights of Hormuz (strongly denied by the Iranians), raising tensions yet further in the Gulf.  However, markets preferred to focus on a speech by the New York Federal Reserve President, John Williams, in which he said, “it’s better to take preventative measures than to wait for disaster to unfold”, helping to confirm expectations of an impending interest rate cut, despite the release of encouraging economic data in recent days.

Over the week up to 12pm London time, US equities fell 0.6%, European equities fell 0.1%, UK equities fell 0.3% despite further weakness in Sterling and Japanese equities fell 0.8%.  Australian equities bucked the trend, rising 0.1%, benefitting from the mining sector as both iron ore and gold prices rose over the week. Emerging markets rose 0.1%, with Hong Kong equities rising 1.0%, in contrast to Chinese mainland equities which fell 0.2%.

10-year US Treasury prices rose, currently yielding 2.04%, whilst UK gilts are yielding 0.75%, and German Bunds minus 0.33%.  Gold rose 1.9%, benefitting from rising expectations for a US interest rate cut and possibly the return of quantitative easing in Europe, and is currently trading at $1,439 an ounce.  Oil, having fallen sharply towards the beginning of the week, recovered slightly on Friday as tensions with Iran increased.  Brent crude oil fell 5.7% up to Friday, trading at $62.9 a barrel, whilst WTI (West Texas Intermediate) crude oil fell 7.0%, now trading at $56.1 a barrel.

Investors relieved despite weakest Chinese GDP growth in almost three decades

China released its second quarter GDP growth numbers this week, which came in at 6.2% for the year, the slowest pace in almost three decades.  However, this was in line with forecasts, and for many, a relief that it was not worse.  The weakness was within the exporting sectors, whilst domestic consumption remained resilient, helping China avoid a deeper slowdown.  The latest Chinese industrial data also pointed to an improvement, with output growing 6.3% in June versus 5.0% in May, along with an improving picture in retail sales growth.

US interest rate cut baked in by markets despite encouraging economic data

US retail sales numbers came in at 0.4% in June, matching the previous month and higher than the 0.1% forecast.  When more volatile items are excluded, like petrol and building materials, retail growth came in at 0.7% versus forecasts of 0.3%.  This follows a forecast beating jobs report earlier in the month.  US Treasuries sold off on the back of this, whilst the dollar rose. However, towards the end of the week, comments from various Fed officials gave the market confidence that there would be an interest rate cut in July and Treasuries rallied, whilst the dollar gave back its gains.  Currently futures markets are pricing in even odds of a 25bps or 50bps rate cut.

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