Aug 2019 Market Update: Brace for more rate cuts and trade war turbulence ahead
Market Snapshot
Finally, after much anticipation from the markets, lobbying from President Trump and much deliberation, the Federal Reserve has finally made its first rate cut since the global financial crisis a decade ago by dropping the target range to 2% – 2.25%, shaving 25 basis points off the benchmark interest rate1. The much–anticipated move, however, faced constant attacks from Trump's recent tweets on how the Fed needs to “cut the rates bigger and faster” in a desire to weaken the dollar for the expansion of the nation's overall money supply and provide economic stimulus5.
The key message from the Fed seemed to be that it is more about downside risks to growth rather than the economy being weak. While some forward–looking indicators on the US economy have dipped, unemployment rate is the lowest in 50 years and Wall Street is at a record high2.
More recently, the Trump administration declared China a “currency manipulator” in a historic move that no White House had exercised since the Clinton administration3. This was followed by threats from the US to slap additional tariffs on China imports and China has now let its yuan currency fall through 7.0 against the dollar4.
With no signs of the trade war simmering down, the global economy is feeling the heat. Analysts also highlighted that growth is the main thing to worry about in the US–China trade war and the outlook for a no–deal Brexit is also weighing on sentiment11. Central banks around the world are easing monetary policy in the face of a weakening global economy, which may suggest a more intensive global rate–cut cycle in the months ahead.
Rates falling everywhere
The monetary policy moves in India, New Zealand and Thailand came as industrial production in European powerhouse Germany fell back in June, adding uncertainty in the eurozone compounded by the trade war4. The slowdown in Europe is also potentially worsened by the effects of Britain's looming withdrawal from the European Union4. Let's take a closer look at how some of the markets below reacted with aggressive rate cuts.
- Eurozone prepares for rates cut
The European Central Bank (ECB) kept interest rates on hold and said it expects its key interest rates to remain “at their present or lower levels” at least through the first half of 2020, suggesting a rate cut could be on the horizon6. ECB president Mario Draghi also said the central bank was looking at resuming quantitative easing in the coming months where it pumps money into the economy by buying up bonds and other assets. Despite a less optimistic outlook, Draghi said the services and construction industry have some bright spots in the eurozone. The eurozone inflation remains well below its 2% target7.
- India cuts rates to its lowest level since 2010
India's central bank cuts interest rates for the fourth time this year by reducing its benchmark repo rate by 35 basis points to 5.4%, its lowest level since 20108. This came following its new government that took charge in May when data showed economic expansion falling to a five-year-low and rising unemployment8.
- New Zealand slashed interest rates to record low
The Reserve Bank of New Zealand slashed interest rates to record low of 1% in a surprise move and did not rule out a further reduction later in the year, saying stimulus was necessary to meet employment and inflation targets9.
- Thailand cuts its rates to 1.5%
The Bank of Thailand also made a surprise rate cut lowering its one–day repurchase rate to 1.5% from 1.75%. The central bank assessed that the Thai economy would expand at a lower rate due to a contraction in merchandise exports, which started to affect domestic demand10.
Seek safe havens in bonds and gold?
Government bonds are rallying as a perfect storm of escalating trade tensions and central bank easing because of global growth concerns sending investors to seek refuge in safe–haven assets such as bonds and gold12. As bond prices surge, their yield or returns to investors fall, with the US 10–year Treasury yield dropping to 1.62%, its lowest level since October 201612. Gold prices also hit a record high of US$1,500 per ounce for the first time since 201311.
What this means for the long-term investor is to stay diversified and continue to accumulate on the dips.
dollarDEX has a wide range of bond funds and some gold funds that you can consider in your investment portfolio that have returns between 2.5% to 11% for the bond funds and between 28% to 32% for the gold funds over the last six months (information accurate as of 13 Aug).
So start exploring close to 1,000 funds using our intuitive fund finder and start your no-fees investing journey with us on dollarDEX.
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Information is correct as of 20/08/2019.
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1 https://www.cnbc.com/2019/07/31/fed-cuts-rates-by-a-quarter-point.html
3 https://www.cnbc.com/2019/08/05/us-treasury-designates-china-as-a-currency-manipulator.html
6 https://www.cnbc.com/2019/07/25/ecb-rate-decision-juy-2019.html
7 https://www.bbc.com/news/business-49113728
10 https://asia.nikkei.com/Economy/Rate-cut-spreads-in-Asia-but-currency-risks-loom
12 https://finance.yahoo.com/news/global-markets-rush-u-bonds-162717624.html