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LGT Beacon: Staying calm and acting counter-cyclically

August 20, 2019

August brought a monetary policy disappointment and revived Sino-American trade tensions, triggering a global pullback in risk assets. In late July, near the markets' top, we had trimmed US equities and increased our gold position. More recently, we bought Japanese equities, after our counter-cyclical investment rules produced a buy signal for that market.

On Aug. 1, the US Federal Reserve as expected cut its policy rate by 25 basis points to a range between 2% to 2.25% and Chairman Jerome Powell communicated that policy makers did not necessarily viewed this cut as the start of new easing cycle.

Investors were particularly disappointed by Powell's policy comments: risk asset prices began to fall, government bonds rallied, and the yield curve flattened and eventually inverted. Inflation-linked instruments started to retreat as well, with short-term inflation expectations tumbling the most, while longer-term projections slipped slightly below to the targeted average level of 2% per year. It is also clear that the markets do not see the trade war as having a lasting net inflationary effect. 

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Note: The next edition of the LGT Beacon is scheduled for September 2019.