• July 8th, 2019
• By Midsilver Investment Limited

From May onwards, the valuation of high-risk assets fluctuated due to unforeseen developments in trade policy and changes to monetary strategies. The upward momentum in the equity and credit markets earlier in 2019 took a downturn in May due to anticipated increases in tariffs for US-China trade and US imports from Mexico. With growth slowing and inflation remaining subdued, central banks in both advanced and emerging market economies made monetary adjustments to stave off further decline.

A shift towards a more supportive monetary perspective bolstered investor confidence. Consequently, in June, stock values soared and corporate bond spreads contracted. Given the widespread monetary adjustments, the US dollar's exchange rates with other advanced economies remained consistent.

However, trade tensions heightened once more in August, putting downward strain on equity and credit valuations. This decline was marked by significant withdrawals from EME investment funds. The renminbi's value plummeted against the US dollar, hitting its lowest in years, and its connection with other EME currencies became even more pronounced, highlighting China's overarching influence. Risky assets in other advanced economies, excluding the US, were notably affected by these trade uncertainties, with their equity markets facing steeper drops than the S&P 500. This period was especially precarious for economies heavily reliant on exports.

The intersection of rising trade tensions, waning growth forecasts, and substantial monetary support pushed sovereign bond yields to their lowest in August. The volume of fixed-income assets with negative yields, predominantly those in euros and yen, hit unprecedented levels. Several countries saw their yield curves turn upside down. On occasion, market players saw this inversion as a harbinger of potential economic downturns. Yet, other indicators presented a more nuanced perspective. With term premiums plummeting, equity valuations found a steadier footing. By and large, financial conditions in most advanced economies were laxer than historical norms.

Major shifts in the trading and monetary arenas spurred the most significant price fluctuations during the examined period. When trade-related tensions eased, US and Chinese stock prices witnessed remarkable increases, while US Treasury bond prices took a sharp dip. Likewise, when the Federal Reserve signaled a more relaxed approach than expected, high-risk asset values also went up, albeit less markedly.

Beginning in May, asset valuations mirrored growing concerns over trade dynamics. Global equity prices dipped by 2% early in the month following the US's announcement of heightened tariffs on Chinese imports. The decline deepened mid-May as China retaliated with its own set of tariffs. Another round of sell-offs came towards the end of May when the US considered imposing tariffs on Mexican imports unless migration to the US was curtailed by Mexico. Consequently, global stocks ended May with a decline of roughly 5%.