The Montilla Private Wealth Market Update - June 24, 2019

The second quarter of 2019 has been one of mixed signals. On the one hand, we have seen the stock market hit all-time highs on April 30th and again on June 20th, and on the other hand, we have seen both worrying and reassuring economic data. Let’s take a closer look at what exactly have been the driving factors for this.

Trade Uncertainty:

The markets are well aware that President Trump makes heavy use of tariffs as part of his negotiation tactics. The trade war with China has yet to be resolved and Trump raised the tariffs on $200 billion worth of Chinese goods from 10% to 25% on May 10, also threatening an additional $325 billion worth of Chinese goods with tariffs (effectively covering all of the United States’ imports from China). Huawei Technologies, one of China’s biggest and most important multinational companies, has also been singled out in the trade war escalations and has been blacklisted from doing business with American companies. China decided to retaliate with their own tariffs ranging from 5% to 25% on $60 billion of US goods starting on June 1. This prompted over 600 American companies to send a letter to Trump urging him to resolve the trade war on June 13, stating that the tariffs are not an effective way to make China change their trade practices and instead they hurt American businesses and consumers. Trade talks between the two countries are set to continue at the G20 summit on June 28-29.

China is not the only economy that Trump is targeting with tariffs. The World Trade Organization (WTO) ruled in May of last year that the EU had indeed provided illegal subsidies to Netherlands-based Airbus (hurting US-based Boeing), and frustrated at the slow pace of talks Trump is readying a list of $11 billion worth of EU goods to tariff this summer (pending further WTO ruling on whether or not the US may take countermeasures), causing the EU to draft their own list of retaliatory tariffs. Trump has also decided to revoke India’s preferential trade treatment, which allowed $5.6 billion of Indian goods to enter the US duty free, prompting retaliatory tariffs on 28 US goods. Trump has also used tariffs in an attempt to resolve America’s immigration issue with Mexico by threatening escalating tariffs starting at 5% and increasing to 25% on all goods imported from Mexico “until the illegal immigration problem is remedied”, which were avoided when Mexico agreed to deploy its National Guard to its Southern border to stem the flow of South American migrants to the US.

Brexit remains an issue after (now former) Prime Minister Theresa May secured an extension until October 31st before stepping down on June 7. The current favourite to replace May is Boris Johnson, a staunch supporter of Brexit who has been very vocal about his willingness to accept a no-deal Brexit in order to exit the EU on time.

Economic Data:

The economic data released over the quarter has been mixed. The dreaded inverted yield curve we saw towards the end of last quarter reversed shortly afterwards, but has since returned and remained inverted since May 23. The International Monetary Fund (IMF) has cut their forecast for global growth in their latest World Economic Outlook and the WTO has also revised their world trade forecast for 2019 downwards. At the same time Canada and the US are both reporting record low numbers for unemployment and downward trends in their trade deficits (excluding the US’ politically sensitive goods trade deficit with China), which are both signs of economic recovery]. This conflicting data has made it very difficult for the central banks of the world to assess the proper course of action. Most notably the US Federal Reserve has gone from raising interest rates in December 2018 and signaling 2 more hikes in 2019, to signaling no rate changes in early 2019, and finally signaling possible rate cuts in the future this quarter.

All of this has shaken the markets and greatly increased volatility, leaving many to wonder what the next trade war will be and when the next bear market will occur, which is why Harbourfront Wealth Management has created the Rockridge Private Debt and Real Estate pool aimed at reducing stock market exposure while maintaining steady income and returns. From the Montilla Private Wealth Advisory Team, have a great summer

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