June 2018 Monthly Market Review

US strong momentum continued apace with a steady flow of robust data in the second quarter. With strong economic performance and inflation approaching its target, an in- crease in the Federal Reserve (Fed) policy rate is looking even more likely.

European data was more mixed. European equities ended the month mixed as trade talk continued to dominate market sentiment.

UK Prime Minister Theresa May won a key vote putting a halt to pro-Europe Conservatives handing Brexit negotiating power to Parliament, which would have more than likely ensured a soft divorce from Europe.

The Bank of Japan (BoJ) reduced its inflation expectations with the Governor stressing his intentions to continue with loose monetary policy. Trade war talks continue to be a major concern with US President Donald Trump threatening automakers with tariffs.

The Chinese currency witnessed its worst month ever in June 2018 after falling by 3.3{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} against the US dollar. Downward pressures on the currency have largely stemmed from a strong US dollar.

Positive economic data and extraordinary earnings momentum supported US equities in the 2nd quarter of 2018. Consumer confidence remained strong and the unemployment rate also reached an 18-year low of 3.8{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205}, accompanied by strong wage growth. Strong US economic data gave the Federal Reserve the confidence to increase interest rates again in June (0.25{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205}) and signal two further hikes to come later this year. The out performance of US growth and interest rates may support the dollar especially in the short-term.

The positive economic data supported moves from the Trump administration to impose billionaire tariffs on Chinese imports, and withdraw from the Iran nuclear accord. The trade pressure from the US is driving oil prices higher and weighing on longer-term growth expectations. Over the last quarter, energy and technology shares performed well. Trade war negotiations continue to weigh heavily on market performance. During the month, the G7 met but was unable to find a solution to global trade tensions. Trade tensions continue unabated and are likely to accelerate. Further actions will be considered if China were to take revenge. Europe has a detailed plan for $ 300 bn of US products. These tensions have increased risks and stressed markets, with the Chinese stock market exposed to strong pressure.

Europe has not been performing as well as the US in the second quarter, with trade worries and political uncertainties weighing heavily on the Eurozone’s outlook. President Donald Trump’s threat to impose heavy tariffs on car imports had an impact on the reading of the German ZEW survey for Economic Sentiment, which fell significantly. An EU migration summit has revealed many divergences among European political patents, which show a greater weakness of the European Union. In contrast with the Fed, after a string of disappointing data and consistently low core inflation, the European Central Bank (ECB) announced that interest rates will not be going up until the next year, and that quantitative easing in the Eurozone would come to an end by the end of this year. President Mario Draghi later announced that the ECB was not in a rush to raise the policy rate and the next hike was pushed from June to the autumn of 2019.

At the end of last quarter, markets were convinced that the Bank of England would raise rates in May 2018, but this was not the case, due to disappointing economic data. With unemployment at its lowest since 1975, and surveys indicating firming wage pressure, it is possible that any increase in rates this year will be related to Brexit negotiations. The recent weakness in the euro has not benefited European equities. Sterling performed poorly after the Bank of England backed away from a much-anticipated rate rise (in sharp contrast to an increasingly hawkish Fed).

European and UK Equities

Asian (ex Japan) equities were firmly down in the 2nd Quarter of 2018, with global trade concerns serving to increase risk aversion. During the month (June 2018), US President Donald Trump and North Korean leader Kim Jong Un attended a summit marking a historic moment as no sitting US president has ever met with North Korean leadership. Emerging markets in June 2018 continued to record negative performance (loss 4.6{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205}) as measured by the MSCI EM Index. The index is down 8.7{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} in the 2nd quarter of 2018 because it suffered losses on the back of general trade war talks. Trade war talks also affected The Shanghai Composite Index, which shed 8.0{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205}, bringing its performance to -10.1{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} (on a quarterly basis), and South Korea’s KOSPI200 Index dropped 3.6{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} in June (down 4.8{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} on a quarterly basis). The Chinese currency witnessed its worst month ever in June after falling by 3.3{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} against the US dollar.

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