Reprinted with the kind permission of the Global CIO Office
Positive market sentiment remains underpinned by ongoing trade negotiations. Yesterday’s announcement of a trade agreement with the UK government has raised hopes that similar deals could follow. However, the path to broader trade resolution remains difficult. U.S. officials cautioned that talks with South Korea and Japan are still in the early stages. Meanwhile, the upcoming weekend meeting between the U.S. and China has been welcomed as a positive development, but expectations should remain modest. The discussions are largely seen as a diplomatic icebreaker following the tit-for-tat escalation in tariffs over the past month.
Japanese equities are a standout from recent trading with the Nikkei enjoying an 11-day positive run. The market for sure was left behind and although the authorities have downgraded growth and the timing of bringing inflation down to target, in a positive way nothing had changed in terms of the commitment to the corporate sector to ongoing restructuring. The relative performance of the index has rebounded after the previous under performance.
Performance of Topix and MSCI Japan relative to MSCI World (local currency). The hopes for better news from the trade talks and China’s ongoing programme of (modest) support for its economy has drawn a line under the weakness of the Brent oil price with a close to 5% rebound from the lows.
High Wage Growth and Weak Productivity – A Toxic Mix for Bonds
While we continue to harbour medium-term concerns about the performance of U.S. equities, it is the bond market that is likely to dictate the underlying tone of markets. The combination of rising inflation, slowing growth, and renewed talk of tax cuts presents a troubling backdrop for fixed income. We’ve already highlighted the structural risk to inflation control stemming from the sharp decline in immigration trends. Yesterday’s data only reinforced those concerns, with a significant drop in productivity (-0.8%) and a sharper-than-expected rise in unit labour costs (5.7% vs. 5.1% expected). This is not the kind of data that will help contain bond yields or credit spreads.
Reprinted with the kind permission of the Global CIO Office
