It took NASA's New Horizons spacecraft almost 10 years to travel three billion miles to Pluto for the first time. The seminal flyby revealed majestic icy mountains and frozen plains on Pluto, as well as completed the Grand Tour, a survey of our solar system. During the same time, the China A-shares market explored some unfamiliar territory of its own: some of its peaks and valleys are among the most spectacular for a stock market. However, its latest bout of volatility reinforced concerns regarding China's sluggish economy and what a further slowdown could mean for global growth.
Looking for Gravity Assist
To give its economy a lift, China put forth rounds of monetary stimulus and, most recently, devalued the yuan. While the latest official gross domestic product (GDP) growth surprised many by beating expectations, there was skepticism as to the accuracy of the numbers, a view supported by soft manufacturing and trade data. With China slowing and the United States tentatively expanding, global growth will likely disappoint.
Despite being mostly isolated from the global financial markets, the China A-shares market’s tumult has had a wide, deleterious effect. Commodities, particularly oil and precious metals, plunged alongside A-shares on growth concerns, and we see more downward pressure ahead as the U.S. dollar strengthens. Likewise, emerging-market stocks had the worst monthly performance relative to developed markets since 1998.
Signals from Mission Control
Amid heightened volatility, investors continue to recalibrate their expectations for U.S. growth and the timing of the first interest rate hike from the Federal Reserve (Fed) in nearly a decade. With a fairly upbeat assessment of the economy, the Fed left the door open for a September liftoff despite some notable soft spots.
The Journey Onward
Higher risk aversion increased global demand for safe-haven bonds, especially longer-maturity U.S. Treasuries. The yield curve will likely flatten more over time, but we stay the course and prefer stocks over bonds. However, be mindful of momentum trades, which could unravel as volatility rises.