June 2019 Wrap-Up

Good day,

On the backdrop of what has been an odd first half of 2019, global stock markets rebounded in June as the US canceled tariffs on Mexico and the central bank’s sweet talk led to falling interest rates; the TSX Composite rose 2.52% while the S&P 500 rose 3.3% (in CAD). The Canadian Universe Bond Index rose 0.91% during the month; and with the Government of Canada 10 Year bond now paying 1.47%, the global bond market is pricing in very little growth.

The top market news of the month was the European central bank’s hint of more easy money through lower interest rates and expanded bond buying. Not to be outdone, the following day, the US Federal Reserve indicated that rate hikes could come as soon as July and equities perked up on the growth expectation. However, the reaction was muted as it seems the stock market had already priced in the news, taking cues from the bond market all month.

Currently over half of European government bonds now have a negative yield – meaning if you were to lend your money to the government, you’d have to pay them interest, which sounds like a clever way to tax you! In all seriousness, paying interest to lend your money makes no sense, so how does this inversion happen? It happens when bond traders bid up the price of the bond so high that the return becomes negative (hoping to sell the bond at a higher price than they originally bought it) as they believe the European central bank will buy the bonds from them to keep interest rates low (in this case negative) in an effort to generate growth. Clearly, this situation isn’t sustainable and should bond prices start to fall if yields reverse and rise, many traders and funds will be caught off-side with these negative bond positions.

Instead of traditional publicly traded bonds, many of our firm’s clients hold private debt securities which have a low correlation to public equity and debt markets and have therefore avoided the situation. 

On the equity side of things, markets started strong in June when President Trump cancelled tariffs on Mexico and both European and US central banks indicated rate cuts would be coming soon. With interest rates now so low, the “hot” central bank money seems to be redirecting its way into equities with earnings yields higher than low yielding bonds. However, closer to the end of the month, the US central bank governors talked down rate hikes by implying they make cut rates by only 0.25% at their next meeting; the market was clearly expecting more, and equities sold off. Central banks seem to be painted into a corner, as historically they had much higher interest rate levels to cut from when economic slowdowns occurred. With little wiggle room as rates are already low, central bankers are trying to thread the needle perfectly, and if the S&P500 moves higher there may be less willingness to reduce rates, causing further volatility in equity markets.

Although equity markets have been strong, we continue to play things defensively by focusing on quality businesses with strong balance sheets and coupling our equity allocations with alternative asset classes.

Have a good weekend. 

Daniel Popescu CFP, CIM, FMA, FCSI

President & CEO


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