Positive start in 2019 – followed by greater caution?
Political uncertainty remains a concern
For almost three months, the U.S.-China trade talks and dovish central bank messaging led to optimism, resulting in the best start to a year for global equities in more than 20 years. Investors, however, have now shifted focus and are starting to react more carefully to economic data. Equities rallied in most markets between 10 and 15% through the first quarter thanks to central bank liquidity injection, despite global macro data showing signs of a slowdown. Commodity markets also performed positively in the first quarter. Copper and oil prices rose significantly in the first quarter, gold performed positively in recent weeks as well, only to name a few.
Despite a surprisingly accommodative stance by the Federal Reserve last week, stock markets started to retreat the day following the announcement. Bond markets have also been showing signs of distress over the past week. With the outcome of the Brexit negotiations still unclear and the world still waiting for a trade deal between the US and China, political uncertainty remains a concern.
Many investors aim for locking in long-term yields
World trade began contracting sharply during the fourth quarter last year. At the same time, corporations postponed capital investment in response to the US-China tariff war. In addition, US households tightened their belts in December. This led to a large drop in retail sales. The US 10-year Treasury yield fell below the three-month rate last week. This means that investors want to lock in long-term yields. This is considered a possible action if the Federal Reserve reduces short-term interest rates as the economy weakens. The Fed Funds market is now pricing in a 70% chance of a rate cut by 2020!
Just three months ago, the market had been pricing in two rate hikes in 2019. According to the International Monetary Fund (IMF), global expansion has weakened. The slowdown in manufacturing seems a global trend in the first quarter, as international trade tensions appear to be leaving their mark on factory output. The global growth forecast for 2019 and 2020 had already been revised downward by the IMF last fall. The global economy is now projected to grow at 3.5 percent in 2019 and 3.6 percent in 2020.
Volatility and uncertainty – we expect a late stage cycle environment
We expect the year 2019 to deliver further growth but at a lower level. Fiscal and monetary policy support is likely to continue and should support the markets. We do not expect the economy to falter: Central banks incorporate market developments in policy settings and seem to stand ready to stabilize the market. For this reason, we do not see a recession coming in the US. However, we expect persisted elevated volatility in equity and fixed income markets. In summary, we will continue to align our portfolio for a late stage cycle environment with increased volatility and uncertainties coming from political risks. We are continuing to monitor the markets carefully.