In July global bond prices fell and developed equity markets had a strong month in anticipation of the big monetary policy decisions at the Bank of Japan, Federal Reserve, ECB and the Bank of England. The US President characteristically broke with protocol and openly expressed his dissatisfaction with the strength of the dollar and rising path of interest rates. The Trump administration continued to fight its trade war against China but made some peace with the European Union. There were large moves in currency markets, the dollar had a very strong month against other major currencies, the pound weakened on hard Brexit worries while the renminbi devalued considerably against the dollar.
The Bank of Japan was the first of the big central banks to have news-flow, in this case, there was a leak by credible sources it is considering changes to its ultra-loose policy. The bank is said to be worried that it is taking too long to reach 2% inflation, a flat yield curve is bad for banks and its asset purchases are bad for liquidity and price discovery. When the bank made its official announcement, it did indeed allow more flexibility for yields although left the yield target unchanged at 0%. It will buy more Topix ETFs and fewer Nikkei in which companies which are price weighted. The new tightening trajectory is happening within a dovish context however, as the BoJ cut its inflation forecasts and said expectations of deflation are entrenched. The moves in JGB yields was large, but in the context of any other bond market, remained small. The Yen rallied a trade weighted basis and we are a little perplexed why it is not getting more attention in the financial press.
The Bank of England also tightened policy, raising rates for the second time in ten years from 0.5% to 0.75%. This was not enough to support the pound which weakened as investors began to increase their expectations of a hard-Brexit. We believe the strong possibility of a hard-Brexit is necessary for the UK to maintain its strong negotiating position until a deal is made and therefore remain downbeat on the prospects for sterling. While there was no change to ECB policy just yet, it did confirm that its asset purchases will end this year and expressed concern that markets had not priced any rate rises until the end of 2019.
President Trump threatened further tariffs on China as the trade war rumbled on, but made some peace with Europe as he and European Commission President Juncker came to an agreement that neither would impose any further tariffs or trade barriers on the other. The increasingly aggressive US stance against China saw the renminbi devalue quite significantly against the dollar as investors took capital out of the country. Contrary to popular belief that China is using its currency as a weapon in a trade war, we believe it is actively trying to prop the currency up. The US administration continued to take aim at Iran, re-imposing sanctions and threatening European companies who do continue to do business there.
Anna Haugaard, CFA
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