U.S. and European central banks promised to take precautionary “insurance” measures despite full-employment conditions in much of the developed world that could cause inflation. Their concern was that trade-war-related uncertainties might favor the deflationary forces of the ever-worsening global manufacturing recession over late-stage economic-expansion pressures, thereby threatening the vibrant services economy.
Category: Market Perspectives
While the re-emergence of disappointing economic news suggested that global growth was decelerating, it was politics that spooked markets in May. It came in the form of an unexpected 9th inning breakdown in U.S./China trade talks and subsequent signs that President Trump might view bilateral tariff and company-specific threats as a core part of his expanded toolkit for “winning” (on both the employment and election fronts).
At one level, April developments are easily summarized: the combination of reassuring economic reports across leading economies, even more supportive central bank policies (a luxury made possible by quiescent inflation), and hopes for a finalization of a comprehensive U.S./China trade deal propelled risk assets to their fourth consecutive monthly gain.
The Federal Reserve Board (Fed) somehow managed to overshoot markets’ already dovish expectations by unexpectedly moving guidance directly from a rate hike bias to one of rate cuts without stopping at “pause.” This “miracle drug” not only drove a massive move downwards in global bond yields from already low levels, but anesthetized equity investors from concerns over fundamentals such as declining economic growth and corporate earnings.
A panoply of investors hope that the Fed’s dovish policy guidance could successfully affect a soft landing and PM Theresa May’s newest plan would eliminate the risk of a near-term no-deal Brexit. Also, a January spike in Chinese credit would cause growth to inflect and President Trump’s direct involvement in China talks would lead to a trade agreement combined to facilitate a continuation of January’s positive momentum for risk assets.
Markets staged a rare broad-based, V-shaped recovery from the deep December sell-off. Following a remarkably strong employment report and Fed guidance that surpassed even the most dovish expectations, equity investors quickly reversed their assessment of the risks U.S. recession and a Federal Reserve Bank (Fed) tightening overshoot. The hard data of moderating U.S. growth in the face of deteriorating conditions overseas merely confirmed pre-existing trends. Optimism that worst-case outcomes would be avoided with respect to Brexit and the U.S./China trade war contributed to the risk-on sentiment. Credit markets were the natural beneficiary of the renewed optimism: an 18% bounce in crude oil prices, and stable benchmark-Treasury yields with the high-yield market having its best month since 2011.
Global equity markets experienced their worst December in more than 50 years, with losses of more than 7%. Investors lost confidence that U.S. growth would remain resilient in the face of the continued slowdown in the rest of the global economy.
In the aftermath of October’s equity collapse, a nearly-two standard deviation outcome, November produced modestly positive equity returns of 1.5% after a late-month rally. The rally was spurred by dovish Federal Reserve Board (Fed) commentary on November 28, benign U.S. economic news and hopes for a temporary U.S./China trade truce. Despite the positive returns, risk assets failed to stabilize, with volatility remaining at elevated levels.
The realization that the Fed was serious about maintaining its path of ongoing rate hikes amidst increasing concerns over growth that was peaking in the U.S. and slowing overseas proved deadly for both equities and Treasuries in October.
Global equities finished the month modestly higher at +0.2%. Unexpectedly strong U.S. growth numbers (but without growing inflation pressures) allowed U.S. equities to hold their value despite a sharp pick-up in interest rates.