Bonds Stage a Recovery as Central Bank Stimulus Delivers in Line with Expectations
Following on from last week’s risk-on shift and subsequent bond sell off, sentiment reversed this week as geopolitical tensions and data took centre stage, while central banks delivered in line with expectations to the benefit of risk-off assets. Over the week, it became clear that risks are now increasingly skewed towards the downside, with global growth slowing at a faster pace than first expected, as the OECD announced a further cut to global growth of 30 basis points, from 3.2% to 2.9% for 2019. The bank cited intensifying trade conflicts and insufficient government intervention as key factors driving the downgrade.
The OECD is the latest institution to sound the alarm over the state of the global economy. In the past two weeks, the US Federal Reserve, the European Central Bank, the People’s Bank of China and numerous others have eased policy to sure up demand, urging governments that fiscal stimulus will also be required to stabilise growth. The Federal Reserve was the latest central bank to introduce fresh stimulus, as the Federal Open Market Committee voted yesterday to cut rates by a further 25 basis points to the range of 1.75-2.00%, in line with market expectations. As expected, the Bank of England left rates unchanged in today’s rate decision, as the central bank holds out on policy changes until the Brexit outcome is known.
For more information on yesterday’s Fed rate decision and what this means for markets, please see the attached Market Update Document.
It is clear that economic conditions are deteriorating, fuelling a risk-off shift this week which was accelerated by rising geopolitical tensions, after a series of missile strikes on Saudi Arabia’s oil industry which has been linked back to Iranian sources. At the same time, the economic data on a global scale continued to disappoint, increasing recessionary risks. The slowdown in global growth is broad based, with further downward growth reversions expected ahead of the annual meetings of the World Bank and the IMF next month. As World Bank Chief Malpass highlighted this week, the slowdown is apparent in China’s deceleration, substantial downturns in a number of Emerging Market countries, and growth disappointments across parts of Europe. At the same time, data is beginning to suggest weakness is feeding through into the US economy, as trade conflict and slowing global growth weighs on corporate profitability and exports. The growth estimate as it stands is already the lowest since the financial crisis, set at 3.2% in July.
Overall, while the intraweek movements remain volatile, the data continues to reinforce our economic thesis, confirming that last week’s bond sell off was not a full rotation to risk assets, but rather a profit-taking exercise. As a result, we continue to await a decline in markets and remain confident in our defensive portfolio allocation.
Key events this week:
- Friday: Eurozone Consumer Confidence, Japan Inflation Data
For anyone who wants further data to substantiate the position please review the attached Global Economic News Document attached and the economic data set also attached.
Model Portfolios & Indices
Over the week, most global equity markets gained on trade optimism and central bank movements amid rising downside risks in the global economy. Markets remained highly volatile over the week as recessionary concerns remain, with investors focusing on trade and central bank developments as geopolitical risks remained high and the data continues to disappoint.
Safe haven assets such as gold gained over the week alongside bonds, indicating that the risk-on sentiment observed last week was not here to stay, with bond yields beginning to decline again over the week. Equity markets gained over the week overall, however the intraday movements reflected a lack of direction as equity investors grapple with recessionary fears, with movements indicating that last week’s sell off in bond markets was primarily a profit taking exercise rather than a full risk-on rotation. It is clear that geopolitical tensions remain, and the economic data continues to illustrate weakness in the global economy, with risks now firmly tilted towards the downside. The OBI portfolios remain defensively positioned with limited equity exposure and a downward tilt which seeks to benefit when equities decline, and our portfolios remain well positioned given current conditions. The portfolios declined over the week as the bond exposure suffered on Thursday and Friday last week, before staging a recovery as recessionary concerns resurged over the weekend. It is expected that the bond exposure within the portfolio will continue to perform over the coming weeks, regaining lost ground following last week’s sell off.
As we progress from here, it is important to recognise that we should not let benchmark performance make us feel like we have missed out on anything, because although we have in the short term, recent performance shows how quickly this can be reversed given current levels of risk and uncertainty.
Overall, it is our view that equity markets will continue to decline before adjusting to the new norm based on lower global growth and weaker corporate profitability. The key point here is to take a long-term view, look at the current level of uncertainty in the global economy, and remember that the portfolio is designed to minimise your exposure to risk and preserve capital. Markets are behaving irrationally, therefore the most sensible strategy is a defensive one given current market conditions.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested.
Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1893, New Zealand became the first nation to grant women the right to vote after Governor Lord Glasgow signed a new Electoral Act into law. As a result, New Zealand became the first self-governing country in the world which women had the right to vote in parliamentary elections.
Have a great week,
Jason & Gina