For those who have been following markets, both credit and equity over the past few quarters, it would be safe to say that large volatility has been pretty much the order of the day. Marked market weakness characterised the last quarter of 2018, lending itself in part to a more-than-expected hawkish US Federal Reserve (and a rate hike in December which we could have done away with) and a summit in December which did little to ease investor’s worries that the US-China trade war would be imminently tackled.
The first quarter of 2019 was a completely different story. Investors put money to work, across most asset classes, albeit in a gradual fashion, and this propelled markets higher. Performance was in the green for the first two months of the year, and so far, March too is also indicating a positive performance, whilst noting that last week’s weak China data dented market sentiment by a notable margin.
Attractive value emerged following the market correction in Q418 (all of 2018 can be viewed as a market correction as practically all asset classes ended the year in negative territory), and January proved to be one of the best months on record since the 2008 financial crisis. Those investors who ground their teeth, stuck to their guns, and mastered the art of being patient (and to a certain extent optimistic too), trusting the process of markets and the cycles within which they operate, have today recovered most of the losses incurred in 2018.
We had stated on a number of publications in the beginning of 2018 that last year was to be a challenging year – and that turned out to be right. We have also been stating, since mid-Q418, that there were beginning to emerge pockets of value in both equity and credit markets, which, coupled with the marked increase in dovishness by both the US Federal Reserve and ECB, has contributed to the positive year-to-date screens we can see so far.
Whilst the bulk of earnings season is out of the way, market focus will inevitably turn to incoming economic data, development on the US-China deal and European parliamentary elections. Undoubtedly, a string of encouraging news flows would propel market optimism higher. Having said that, the moves we saw last Friday, following a worse-than-expected drop in Chinese exports, gave us a taste of how quickly markets correct, very reminiscent of a handful of trading sessions we had in 2018.
With a near-term trade deal between the US and China appearing to be the likely scenario, we shift our focus on central bank activity and, more importantly, their tone and language. The u-turn taken by the US Federal Reserve, following the rate hike in December, had a somewhat ripple effect on other central banks, which in turn triggered a reversal in market sentiment to the upside. In addition to that, albeit still being early days, there seem to be indications that the stimulus measures implemented in China are slowly beginning to positively impact the Chinese economy.
That said, we must not get carried away as the outlook for global growth still remains anchored at bearish territory, whilst the US–China deal should not be taken as a done deal as tensions between both parties could yet emerge. In addition to that, markets have been startled by the negative demand shock from China, which, when combined with market uneasiness and uncertainty, we have seen a number of global companies beginning to put their investment plans on hold.
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