creechurchknox

Investment Commentary by Creechurch Capital

July 30, 2019

Miles Ashworth, Head of Private Wealth at Creechurch Capital, the Douglas-based boutique discretionary fund management firm, gives his expert commentary on Q2 2019.

 

On the face of it, everything looks great. Stock and bond markets ended June, and thus the second quarter, in familiar territory around all-time highs having more than recovered from their bout of nervousness, or perhaps reality, in May.

 

However, it’s hard to justify hanging out the bunting just yet, because the main catalyst for this latest rally is central bank interventions from the US Federal Reserve and the European Central Bank (ECB). As we can see from the market reaction, this is undeniably good news in the short term.

 

US stocks rose over c.+4% in Q2, bringing the year-to-date gain up to c.+18.4%. As we have come to expect, despite UK political upheaval, the UK FTSE100 followed US markets again in Q2 and is now up c.+13% in 2019.

 

Given the leadership of the US bond market, the effect on bonds across the world has been universally positive. US Treasuries have performed well up c.+5.2% this year but higher-risk bonds in US high-yield corporates and emerging markets have performed even better – with some areas of the market up 10%+ year-to-date.

 

This latest move will see many a fund manager reaching for the price charts or a crystal ball for some clue as to how much further the rally may run. The technical chartists will feel vindicated by the fact that the US yield-curve was inverted throughout May, indicating the bond market’s view that the Federal Reserve had got ahead of itself in raising rates.

 

This conventional wisdom on inverted yield curves is just one indicator, and one which some may consider more of a rough guide. One counter argument against the validity of this rule is that yield curve inversions are less reliable when interest rates are very low and it remains to be seen if a decade of unprecedented central bank experimentation has blunted the reliability of these traditional indicators.

 

We now wait to see whether The Bank of England has any appetite to join the party of central bank intervention with some loose language of their own. Their focus may well be the new Brexit deadline of 31st October and a desire to keep their powder dry for whatever may happen next.


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