A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
Market data
US INFLATION REMAINS TAME
The US Labor Department’s Consumer Price Index (CPI) didn’t go up as much as the expected which led to the US dollar falling further. This is because it takes pressure off interest rates rising.
GERMAN TRADE DATA DISAPPOINTS
Germany reported that June’s export levels fell by 2.8%, calling a halt to a five-month run of growth. Imports also shrank by 4.5% for the month, which represents the biggest drop since January 2009. The economy is however still growing despite this news.
JAPAN’S ECONOMIC GROWTH QUICKENS
Japan’s economy grew at its fastest pace for more than two years in Q2 2017 as consumer spending and capital expenditure ramped up and compensated for the drop in exports versus Q1.
GDP rose at a 4% annualised rate for the quarter, beating the 2.5% consensus expectations and well ahead of the 1% Q1 growth. The figure translates into the economy’s longest expansion in a decade since it’s the sixth consecutive quarter of expansion. Meanwhile, inflation stands at 0.4%, still significantly below the Bank of Japan’s 2% target
Gary’s market comments in conjunction with our investment partners
There is normally a positive correlation between high yield bonds and equities. This means high yield are highly sensitive to equity movements. US high yield is also impacted by macroeconomic momentum.
Globally we have seen clear signs that economic growth is picking up through improved data assisted by unemployment at multi year lows. This environment has caused spreads for high yield debt to narrow and no longer offer good value.
Bond fund managers within the portfolios are therefore lowering their risk exposure in favour of investment grade and developed government debt.
Threats of “fire and fury” by President Trump and missiles landing near Guam by Kim Jong-Un (the US military bases occupy some 30% of the island) led investors to seek shelter in gold as globally stock markets` retreated. As a result, the price of gold rallied to US$1,286 an ounce amid the rising geo-political tensions.
China’s announcement that it would sit on the fence in the event of any conflict also fuelled concerns. The belief is that if Trump is forced to back down from his belligerent stance, then, instead of trading threats with North Korea, he could place sanctions on China in order to save face.
Across the risk profiles, 7IM holds gold in their portfolios at a weight of between 6% and 8%. We believe that the asset will continue to be worth its weight in the months to come since it also benefits from the weak US dollar and lower bond yields.
Sources: LGT Vestra and 7IM
