9th July Market Commentary

Henry Adams

Chief Product Officer
Tuesday, Jul, 09, 2019

Since our last distribution Central Bank independence has been a hot topic (potato). In the US, the President has for some time now been pressing the Federal Reserve to change the tone, cut rates and by doing so further stimulate what has been one of the longest bull runs in history.

All major US indices are hovering around all-time highs believing that a rate cut is all but a certainty. My humble opinion continues to be that this is a little preemptive, especially in light of the very strong employment data. However, markets do not want to give up on the opportunity to take profit that the change in rates would bring. Turkey has taken even more direct intervention, with President Erdogan firing the Governor, Murat Cetinkaya a year early.

Aside from this, the long-awaited news from Deutsche Bank of its aggressive restructuring has become reality. Whilst the headline reduction in employees was lower than many expected (at a still staggering 18,000 vs 20,000). The number that did beat was the size of the “non-strategic portfolio” which grew from estimates around the EUR 40-50BN mark to EUR 74BN. Whilst the news appeared to initially be taken well, by the close of the market the stock had fallen back below the Monday morning open and all associated euphoria appeared to have evaporated.

With the tricky calendar date of June 30th a distant memory and the consequent return of bank balance sheet availability, the improvement in yields for UK Treasury Bills has come to fruition. Supply remains thin in the secondary market but the price is at least a few basis basis points friendlier. What has been of most interest of late is Governor Carney’s comments regarding the recent spate of liquidity crises in bond funds. “These funds are built on a lie, which is that you can have daily liquidity, and that for assets that aren’t fundamentally liquid”. Maybe it is time for a proper risk metric and liquidity rating on portfolios, or even better…a prudent, transparent product where there is no maturity mismatch and one is fairly compensated! If only…

Whilst derivatives traders in USD are still fully pricing a cut at the next FED meeting at the end of the month, the odds of it being 50 basis points has all but been eradicated with bets pared back to just the 25 this time around. This has meant a choppy time for those investing across the US Treasury curve, but for now we are still in a position to issue US T-Bill FTFs for a period of up to six months with the yield still starting with a 2!

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