Record highs and record lows. Last week, the S&P 500 closed the trading session at yet another record high, whilst the yield on the benchmark 10-year German Bund is once again testing record low levels, hovering around the -0.40% level. The market rejoicing with negative economic data releases. Central Banks seem very willing on remaining ultra-accommodative. The market pricing in a lower for longer interest rate scenario. Rate cuts on the way, with the first by the US Federal Reserve in over ten years expected tomorrow. The ever growing uncertainty on the US-China trade war. Not to mention Brexit.
These are a few of a series of data points which, when concocted together, have shaped the past 7 months of 2019 and are expected to characterise the remainder of the year.
Dovish central banks have been key to keeping both credit and equity markets supported in 2019. Investors and market participants have been pricing-in a series of rate cuts across both sides of the pond through to 2020, as economic data continues to deteriorate, as the recent weak set of Eurozone PMIs sent Eurozone yields into further negative territory.
Yields on European sovereign bonds rallied on this news and market participants viewed the negative economic data as a clear indication that the ECB will continue to reiterate its dovish stance. This is also proving to be supportive for equity markets as further easing from the ECB only comes six months after it started to unwind its QE programme; reflective of the fact that previous QE programmes and negative rates have failed, or rather, fell short of achieving the desirable and longer-lasting effects on the Eurozone economy.
Credit markets have inevitably posted a positive run in all this, but trading activity has somewhat slowed down and moves have been more exacerbated than one would expect throughout the year. The summer months are generally commensurate with market makers being less inclined to take on risk on their books as international traders take their time off for vacation. Markets have grown to accept this trend, and asset managers generally tend to take any meaningful asset allocations prior to the summer so-called recess.
But, just to put things into perspective as to how central banks have supported markets, and the extent to which market participants have flocked to put their excessive levels of cash available to work in the global search of yield; Greek 10-year government bonds are today yielding ca. 2.0%; go figure! Who would have thought that this would be at all possible 4 years ago when Greece was on the brink of another default, was accepting multiple bailout packages and had its banks shutdown? That’s the market nowadays.
Is the market complacent? Complacency is a complicated word to use at this juncture, but what is sure is that the market returns registered in the past 7 months are generally registered over a 12-month period and not in such a short period of time, so taking risk off the table could possibly be on the cards – but there still is plenty of cash out there which still needs to be put to work. This, coupled with the fact that today, there is in excess of €15bn worth of European government bonds with negative yields indicates that markets are on edge and any slight set of news which either falls below market expectations or exceeds what the market is pricing in could result in a fresh round of volatility, both on the upside and on the downside.
And I haven’t even began to elaborate on Brexit, the Italian political situation and the US-China trade war impasse, which although being on the backburner for the time being, are sure to resurface over the next five months.
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