Trump Reverses Course on Iran
This week tensions between the US and Iran almost boiled over into full blown conflict; President Trump launched strikes against Iranian radar and missile installations, only to call them back at the last moment. Whilst overt hostility was avoided this time, it seems inevitable that the cold war turns hot eventually. The Trump administration, led by national security adviser John Bolton who was instrumental in the Iraq war, is pursuing a policy of trying to crush Iran economically to force regime change; the regime is unlikely to go willingly.
Although regional spats are hardly uncommon, this could be different. Obviously, Iran is no match for the US militarily, however the nature of warfare is changing; with economic, cyber and terrorist attacks now a key way for small nations to level the playing field against a larger opponent. With half the world’s oil supply in the vicinity, along with Iran’s support for a wide network of terrorist organisations, a minor military conflict could become a major global disruption.
US: Federal Reserves Holds Rates
The US Federal Reserve left rates unchanged but signalled it was ready to lower rates for the first time since 2008, citing an uncertain economic outlook amid a backdrop of slowing growth and rising trade tensions. The US central bank exhibited a shift in language away from its “patient” approach and said it would “act as appropriate to sustain the expansion”. Fed officials downgraded its stance on the US economy, saying activity was rising at a moderate rather than a strong pace and acknowledged inflation was running below its two percent target.
US Treasury yields headed towards multi-year lows with the policy-sensitive two-year Treasury yield, reaching its lowest level since December 2017. The market is now pricing in a 100% chance of at least a 25-basis point rate cut at the Fed’s July meeting. The S&P 500 rallied significantly, closing at a record high on Thursday, but before cheering, investors may want to remind themselves that the Fed’s willingness to lower rates is a signal that the economy is slowing, which is traditionally a bad sign for stock markets.
Retail Funds: Next in line for a hard landing
The suspension in mid-2018 of one of GAM’s star absolute-return fund managers and the more recent suspension of the Woodford Equity Income fund has brought the issue of liquidity to the forefront of investors’ minds. This week Morningstar suspended their Bronze rating of the Nataxis owned H2O Allegro Fund as similar question marks were raised regarding the fund’s illiquid exposure. Concerns were prompted by the naming of H2O’s CEO Bruno Crastes as a member of the advisory board of Tennor Holdings, owned by Lars Windhorst, famous for his teenage entrepreneurship, multiple company insolvencies, personal bankruptcy, and jail sentencing. Crastes’ acceptance of this position would be acceptable were it not for the fact that H2O has had significant exposure to the illiquid bonds issued by Windhorst’s businesses including Sapinda and now Tennor, thus creating a very likely conflict of interest.
The naming of Crastes on Tennor’s advisory board in May 2019 and Morningstar’s suspension of its rating this week sent the share price of Natixis plummeting. Time will tell if this will prompt yet another mass exodus of flows from one of the industry’s largest asset managers.
Tech: Slack in the Market
Silicon Valley’s latest market debut, Slack, went public on Thursday. The decision to go public via a direct listing means no new shares and no money raised. The benefit to this type of listing is that on top of being cheaper it allows venture capitalist firms and employees to sell out straight away. The resulting risk is that investors will sell too many shares too quickly, increasing supply beyond demand. Slack haven’t set any rules limiting investors to hold the shares for at least six months, meaning the stock could be in for a bumpy ride initially.
Another example of this type of listing is Spotify, which jumped around before settling in a narrower range. Slack position themselves as a replacement to email, but for the most part web chat is being used alongside traditional email. A headwind for Slack is that Microsoft has now bundled its competitor, Teams, into the popular Office 365 package, so enthusiasm for a standalone chat app may weaken.
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