Week in review: Letting loose

It was a full timetable of central bank meetings this week and markets opened cautiously. Things turned more interesting on Tuesday though, when European Central Bank (ECB) President Mario Draghi delivered his keynote speech in Sintra, Portugal. He surprised fellow board members by stating that “additional stimulus will be required” to revive the Eurozone economy if conditions deteriorate in the next few months. Whether that is a cut in interest rates or further asset purchases, Draghi was keen to show that the ECB’s armoury was not empty. This came after the German ZEW economic expectations survey plunged to -21.1 in June.

Midweek, it was the turn of the US to reveal its hand. The Federal Open Markets Committee removed the word “patient” from its statement on interest rates and referenced increasing “uncertainties” in the economic outlook. Bond prices currently indicate investors are expecting two more interest rate cuts by the end of the year.

Not succumbing to the dovish peer pressure, the Bank of England signalled at its meeting on Thursday that it will maintain its course of gradual interest rate rises. Its Monetary Policy Committee voted unanimously to keep rates on hold for now, as the risks of a no-deal Brexit increases. Wary of stuttering global growth and trade tensions, the Bank of Japan also left its policy on hold.

How low can they go?

All this talk of letting loose got the fixed interest markets fired up. With the Fed losing its ‘patience’ on interest rates, the yield on the 10-year US Treasury fell below 2% for the first time since late 2016. In the Eurozone, 10-year government bonds across the currency union also fell to record lows following Draghi’s comments. This included the 10-year German bund (the region’s benchmark), which fell to -0.32%. French 10-year yields turned negative too for the first time. Elsewhere, all-time lows were reached in at least 16 other countries: from Sweden to Spain, Portugal to Australia.

Bond yields moving below zero, once considered an anomaly, is now becoming the new normal. The value of negative yielding debt globally reached an all-time high of $12.5 trillion. Bonds on negative yields mean that if investors hold them to maturity, they are guaranteed to make a loss. Almost all Swiss government bonds now have negative yields, while Japan accounts for more than half of the world’s negative yielding debt.

Equity markets, meanwhile, were cheered by the central banks’ talk of taking things easier. A potential thawing of trade tensions between the US and China provided a further fillip. President Trump has promised an “extended meeting” with President Xi Jinping at next week’s G20 summit in Japan. Overall, the FTSE World Europe ex-UK finished 2.1% higher, while the S&P 500 reached a new record high, rising 2.3% over the week to close on Thursday. The FTSE 100, meanwhile, was up 1.1%.

Rise of the non-profits

Workplace messaging service Slack listed on the New York Stock Exchange this week. Its non-IPO IPO (it is going for a Direct Public Listing instead) resulted in the firm being valued near $25 billion. Slack is the latest in a line of loss-making companies offering shares to the public, and allowing access to a less traditional way of donating to non-profits.

A mix of turbulence and blue skies

It was a bumpy ride for airline stocks this week. Citing increased competition to win short-haul passengers, Germany’s Lufthansa issued a shock profits warning. Its shares nosedived more than 12% after the news. There was turbulence of a different kind at the Paris Air Show, when IAG, owner of British Airways, announced it would buy 200 new 737 Max passenger jets from Boeing. The 737 had been grounded following two fatal crashes. This deal marked Boeing’s return to business and infuriated its rival Airbus, who said it had never been invited to pitch to IAG for its business. Airbus hit back, however, by securing deals worth around $36 billion with American Airlines and Qantas.

Over other skies, the US banned its airlines from flying over Iranian airspace in the Strait of Hormuz. This followed the shooting down of a US drone earlier in the week. European carriers are also following this edict, causing diversions/cancellations which will add to the airline industry’s costs.

Going once, going twice, gone

World-renowned auctioneers Sotheby’s has been acquired by a French art collector. The takeover means Sotheby’s is back in private ownership and brings the hammer down on more than 30 years of it being listed on the New York Stock Exchange. The auction house has sold many iconic art pieces and collectibles over its 275-year history. Works from Munch, Monet and Mondrian to Picasso, Warhol and Bacon have all gone under its hammer. None of these, however, come close to Sotheby’s own hefty price tag – $3.7 billion.

And finally …

This week we have seen politicians pose and posture more than normal, especially in the UK. With the Conservative party leadership contest in full flow, candidates have been tying themselves up in all manner of knots and bending over backwards to win votes to become the UK’s next PM. It seems apt, therefore, to highlight International Yoga Day (21 June).

Celebrating the ancient physical and spiritual practice, Yoga Day has the backing of the UN and major world leaders like Indian Prime Minister Narendra Modi. Anyone can take part and we are encouraged to perform 108 sun salutations, on what is also the summer solstice.

The word yoga comes from Sanskrit, meaning union and harmony. It would be nice to see either of those on the global political stage in the week ahead.

Namaste.

RISK WARNING
The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.