by Connor Darrell CFA, Assistant Vice President – Head of Investments
Global equities ended the week modestly lower after recouping some of Monday’s sharp losses. A re-escalation of trade tensions dominated the attention of markets for most of the week, as China allowed its currency to decline to its lowest level against the dollar in over a decade. The move has been widely viewed as a response to President Trump’s announcement of a new round of tariffs (a weaker currency makes Chinese goods more affordable for foreign buyers) scheduled to go into effect in September. Bond yields continued their downward trend as the equity market volatility led investors to seek the relative safety of U.S. Treasuries, which still offer attractive yields in comparison to those available in much of the developed world. In many places around the world, bond investors are faced with negative yields.  At present, a record $15 trillion of bonds around the world now carry negative interest rates.

How Do Currency Valuations Affect Investors?
The sudden decline in the value of the Chinese Yuan that followed President Trump’s announcement of a new round of tariffs led many in the administration to label China a “currency manipulator,” a term which was not being used to describe Chinese economic policy for the first time. The rising tensions have increased market volatility and altered the market’s perception of risk, causing safe haven assets such as U.S. Treasuries to rally further.

We often think of our portfolios as being comprised of stocks and bonds, and rarely do we have direct positions in foreign currencies, but it is important for long-term investors to understand how exchange rates fit into the bigger picture.  In general, foreign exchange rates are a byproduct of the economic backdrop. All else equal, a country with a healthier economy, higher interest rates, and a stronger balance sheet will have a more valuable currency. This is why we have seen the dollar continue to appreciate throughout much of the last several years. The flip side of the coin for large multi-national corporations is that a stronger dollar may weaken reported sales and earnings because its products become more expensive to foreign customers. This is part of the reason we have seen a tapering of earnings growth for U.S. companies during recent quarters. 

The strength of the dollar may continue to cause headwinds for large multi-national corporations, but in general, it is a representation of the relative strength of the U.S. economy and should not be overly concerning for investors. The more challenging phenomenon for many investors who may require income generation from their portfolios is that the recent moves have led to increased volatility in markets and have pushed bond yields even lower. In a low-yield environment, it can be tempting for bond investors to seek out more risky assets such as high-yield bonds and the debt of governments located in emerging markets. However, despite their more attractive yields, these investments offer much less protection during market downturns. It will be important for many investors to avoid the temptation to load up on these types of investments and to maintain a healthy allocation to core, high quality bonds due to their ability to provide a counterbalancing effect to equity risks within a diversified global portfolio.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
As was widely anticipated by markets, the Federal Reserve opted to reduce its target interest rate by 0.25% last week. However, the dovish pivot was not enough to support equity markets, which ended the week in a downswing following a series of tweets from President Trump which indicated he was moving forward with an additional round of tariffs on Chinese goods. That this announcement came just one day after the Federal Reserve’s interest rate decision is likely no coincidence, as the Fed’s accommodative stance will provide the President with greater confidence that the economy can withstand the consequences of upping the ante with the Chinese.

With the confirmation that interest rates would slide downward and the increase in equity volatility stemming from President Trump’s tariff announcement, the bond market managed a small rally last week. The Barclays Aggregate Bond Index is now in the midst of one of its strongest years since 2011. 

Global Manufacturing in Contraction
Purchasing Managers’ Indices (which utilize survey data to evaluate business confidence and manufacturing activity) released last week revealed that global manufacturing activity remains challenged by the uncertainties posed by the U.S.-China trade dispute and Brexit negotiations. The U.S. PMI remains the only major region that has held above 50 (a critical level which separates expansion and contraction), though it has declined materially over the last several quarters. PMIs in the eurozone, Japan, and China all remained below 50 last month, indicating that these manufacturing markets are in contraction. 

Manufacturing is far more cyclical than top line economic growth, but the reduction in global manufacturing activity that we have observed over the past year is a symptom of the toll that mounting geopolitical uncertainties are having on business decisions. If businesses’ reluctance to invest in production permeates into hiring decisions, it could begin to impact labor markets and accelerate the arrival of the next recession. Given the relative health of the U.S. economy and the potential for these uncertainties to be lifted by a simple handshake between Presidents Trump and Xi, this scenario looks a long way from playing out.  But for investors who have achieved double digit returns in a year where the economic backdrop has continued to weaken, this type of data should not be ignored and may represent a reminder of the prudence of maintaining discipline and avoiding the urge to chase returns during late cycle investing.