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Weekly Market Update

Geraldine Sundstrom, portfolio manager, comments on what’s moving markets and how the PIMCO GIS Dynamic Multi-Asset Fund (DMAF) is positioned.

From the desk of Geraldine Sundstrom, Friday 14th June 2019.

This week continued to produce more of the same as we wait for the G20 meetings due June 28th-29th.

The two antagonists continued to exchange the usual rhetoric but it increasingly looks like China and the corporate world are preparing for the worst: China continues to cut taxes, inject liquidity and loosen regulations to ease funding towards infrastructure and small and medium enterprises. Apple and Google among others announced plans to move some production out of China and put in place their plan Bs. Next week the public hearings take place for the next wave of US tariffs on Chinese goods. It is still unclear if Trump and Xi will have a private meeting during the G20, or if VP Pence will eventually give his speech (which is expected to be harsh) on China. Finally, a new proxy war between the US and China has opened in Hong Kong, where people are protesting against a controversial extradition law.

On the economic front, more signs are showing that the global economy is slowing. In the first 10 days of June, South Korea's exports (usually a decent leading indicator) plunged over 16 percent yoy. Industrial production in the Eurozone and China are weakening, auto sales in China recorded their worst ever fall at -16.4% yoy and inflation is still missing in action in the US. The only two bright spots were retail sales out of the US and China which continue to show resilience.

The next couple of weeks ahead of the Grand Finale are likely to bring further events, not least the Fed’s meeting next week. Given the deep interest rate cuts priced in the curve, the Fed’s communication in light of these could bring some volatility even though it is unlikely that it will be very comital ahead of the outcome of the G20. As we approach the end of Q2-19, we may also see some corporations coming out with profit warnings depending on the impact of the current slowdown on profitability. We will also look for Trump’s attitude towards Europe after he threatened sanctions on the Russo-German gas project, Nordstream2, and if the new friendship and agreement with Mexico (which seems off to a good start) survives.

The mix of trade war risk and poor economic data that turned every Central Bank of the world dovish, has certainly lent clear support to risky assets but the outlook remains fairly binary and assets both safe and risky are now priced generously. As such, we continue to be positioned light in the DMAF Portfolios, as we judge current risk reward poor and risks particularly elevated for both safe and risky assets. We took this opportunity to reduce further HY credit exposure (-0.3 years market weighted spread) and also lowered our US safe duration by 0.5 years.

The Author

Geraldine Sundstrom

Portfolio Manager, Asset Allocation

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Data as of 14th June 2019 unless otherwise stated. 

Past performance is not a guarantee or reliable indicator of future results and no guarantee is being made that similar returns will be achieved in the future.

GIS FUNDS
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