Market performance in Q2 2018 was marked by positive developed global equities and broad-based emerging markets weakness with two big themes at play:
1) divergence between U.S. growth compared to the rest of the world, and
2) continued escalation of trade tensions.
Global developed equities rallied over the quarter with U.K. export-driven stocks strongly benefiting from a weaker GBP. Equities in the U.S., Europe, and Japan were also up over the quarter.
Emerging markets equities substantially underperformed developed markets over the quarter as emerging markets growth slowed and tension between the U.S. and China on trade tariffs soured investors’ appetite for emerging markets assets.
Pressure from investors unwinding long positioning in emerging markets assets also seemed to further exaggerate the move. U.S. macroeconomic data remained relatively strong resulting in increasing U.S. 10-year bonds yields as inflation continued to pick up and oil prices rallied.
The U.S. dollar appreciated over the quarter driven by the impacts of its better economic growth and tighter monetary policy. Among other major currencies relative to USD, Mexican Peso (MXN) and Euro (EUR) experienced some of the largest drops. Weakening appetite for emerging markets and a looming Mexican Presidential election weighed on MXN while slower Eurozone growth and a dovish European Central Bank weakened the Euro. Moderation in global growth and trade tension escalation weighed on metals like copper while the stronger U.S. dollar pushed gold prices lower.