Tweets and trade defined August and while this is a central part of the market narrative, “the rest” has not disappeared. Central banks, notably Federal Reserve, are still very much centre stage as anxious investors weigh the economic outlook amid weak data. Hopes of monetary and/or fiscal stimulus are rising in a volatile environment where a Trump tweet can wreak havoc. We keep our neutral recommendation between equities and fixed income.
The global economy is currently not showing many signs of turning around. Several indicators, such as PMI:s, are still in a downward trend, especially in the manufacturing sector. Services are holding up better, but the risk of ripple effects is present. So far, the main victims of the trade dispute between the U.S. and China seem to be not themselves but Europe and to some extent, Japan as well as select emerging markets. Germany is a case in point, where the manufacturing sector is under severe stress, or even in recession.
Overall, global growth is hardly crashing, but the gradual deterioration and few signs of a turnaround is a headache for markets. The trade dispute hardly makes things easier. While the tariffs (and counter tariffs) in themselves are quite insignificant compared to global trade, the confidence channel should not be underestimated. In an uncertain environment, it is easier for companies (and consumers) to take a step back, thereby depressing investment and consumption further.
The big counter-weight to the trade/growth worries has been monetary policy, notably since the now famous “dovish pivot” from the Federal Reserve in December last year. Markets are expecting easier monetary policy from around the world going forward. And since the Fed cut in late July, several central banks have followed in cutting rates. ECB is expected to join the fray in mid-September, either with rate cuts or a re-start of Quantitative Easing, or both.
However, the central-bank toolbox is getting emptier, with much of the developed world already at zero or negative steering rates. Hopes are also rising for more expansionary fiscal policy, notably in Europe but also in China, which would probably be a positive for markets. For now, markets are focusing on the central bank “put”, which has supported markets throughout 2019. It continues to be a backstop but hopes for fiscal stimulus are rising too. Markets are indeed waiting for a recharge.
Both equities and most bonds have had a decent year, but the bond market is sending a gloomy message. With long bond yields setting new all-time-lows in several economies, it raises questions regarding the outlook for the global economy. The German 10-year yield hitting -0,70% is hardly a vote of confidence about the future. The confluence between the trade dispute, the global growth outlook and central banks is indeed at the centre of the current market environment. In such a tense setting, market behaviour is skittish with wild swings in both directions.
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