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LCP Investment Summary - June 2018

Posted on 2 July, 2018 by Administrator

LCP Investment Summary - June 2018

Global equity markets fell 0.4% (in € terms) during June, with markets lacking clear direction.

Equities were volatile over the course of the month, mainly as a result the developing trade war which started in late May between the U.S. and a number of other countries. Markets rose and fell depending on the latest trade war rhetoric, especially from President Trump. Further tariffs of $50 billion on Chinese goods were announced, and Beijing responded with retaliatory tariffs on U.S. products. Later in the month the U.S Administration, which seems divided on the issue, softened its tone on Chinese investments in the U.S.

The Federal Reserve raised interest rates again as expected reflecting the strength of the U.S economy. The ECB announced that its bond purchase programme would finish at the end of 2018, and investors were also cheered to hear that there would be no interest rate rise until at least the summer of 2019. Markets rallied on the last working day of the month as the EU agreed a deal on migration, taking the immediate pressure off the German government for the moment which had been a concern for investors.

Eurozone equities fell 0.7% in June, with North American equities up 0.6% in € terms. 

Bonds

Longer-dated Eurozone bond prices rose 0.3% in June, with the yield on the AAA Eurozone 15+ Year Index falling to 0.86% by month end. The Euro Broad Sovereign 10+ Year Index rose by 1.1% with its yield falling to 1.65%.

Yields fell slightly over June, following mixed news for bond investors during the month. The ECB announced that they expect no interest rise until at least the summer of 2019, the EU agreed a deal on migration that eased investor concerns about a collapse of the German government, and we have seen the release of stronger employment and headline inflation data for the region late in the month. 

Sample DB Scheme

The funding level of our sample DB scheme fell to 97.5%, as its assets fell and its liabilities (calculated using a MFS proxy) rose over the month. 

Sample DC Schemes

The High and Medium Risk Strategies fell in June but the Pension Purchase Strategy rose to its high allocation to longer-dated Eurozone government bonds.

Market Performance to 30th June 2018

Global equities rose 6.2% (in € terms) in Q2 2018, mainly as a result of the strength of the U.S. dollar against the Euro, although there was quite a bit of volatility due to the developing trade war between the U.S and a number of other countries. Bond prices rose 3.0% (and yields fell) over the quarter with the Italian political crisis during May, and its possible implications for the Euro, seeing a ‘flight to quality’.

Equity Performance

At the start of the quarter, investors remained concerned over issues with some technology stocks and also the threat of a global trade war which continued to simmer in the background. Fears that the threat of potential U.S. air strikes on Syria could lead to an even more serious situation involving Russia receded after it became apparent that the air strikes would be just one-offs for the moment. As these concerns receded mid-month, investors got back to focusing on more mundane matters like the release of Q1 corporate earnings which were generally ahead of expectations in both Europe and the U.S. However the positive mood was tempered somewhat as U.S.10-year bond yields rose to over 3% for the first time since 2014. Higher yields typically weigh on equities as bonds start to offer a greater yield than equities and they also push up borrowing costs for companies

Global equity markets rose strongly (in € terms) during May, helped by the strength of the U.S. dollar against the Euro. Equities rose during the first half of month, supported by generally solid corporate and economic data, but investors then got nervous over the deteriorating political situations in both Italy and Spain, with the prospect of further elections in Italy being seen potentially as a de facto referendum on euro membership although an agreement late in the month between the Five Star Movement and League seemed to have averted further elections for the moment. President Trump swayed markets with his stance on North Korea (cancelling his planned June summit meeting with Kim Jong Un), China (initially saying that a possible trade war was ‘on hold’ but then a week later announcing that the U.S. would proceed with tariffs of $50 billion on Chinese imports) and then the EU/Canada/Mexico on the last day of the month (to impose tariffs on steel and aluminium imports, starting 1st June).

Equities were volatile over June mainly as a result the developing trade war with markets rising and falling depending on the latest rhetoric, especially from President Trump. Further tariffs of $50 billion on Chinese goods were announced, and Beijing responded with retaliatory tariffs on U.S. products. Later in the month the U.S Administration, which seems divided on the issue, softened its tone on Chinese investments in the U.S. The Federal Reserve raised interest rates again as expected reflecting the strength of the U.S economy and the ECB announced that its bond purchase programme would finish at the end of 2018. Investors were also cheered to hear that there would be no interest rate rise until at least the summer of 2019. Markets rallied on the last working day of the month as the EU agreed a deal on migration, taking the immediate pressure off the German government for the moment which had been a concern for investors.

Bond Performance

In April, more muted economic and inflation data in the Eurozone kept yields flat for most of the month, but they then moved higher towards month-end following the rise in U.S. Treasuries over the psychologically important 3% yield (for 10 year bonds). 

Yields in longer dated AAA-rated bonds fell sharply in May as a result of a ‘flight to quality’ following the situation in Italy mid-month and the possible implications for both the currency and the region. Stronger inflation data at month end saw longer yields rise somewhat. Italian and other peripheral, bond prices fell sharply over fears that new government proposals could threaten Italy’s credit rating.   

Bond prices rose, and yields fell, over June following mixed news for bond investors over the month, leaving longer dated AAA-rated bond prices rising 3.0% over the 2nd quarter and their yield falling to 0.86% by the end of June.

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