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MARKET VIEWS BINARY, REALITY IS EVERY SHADE OF GREY


Q1 2019 provided a quite startling contrast to Q4 2018 in terms of the performance of many asset classes, even if the overarching narrative of incoming economic data, earnings reports and extant political risks has for choice been a case of ‘wash, rinse, repeat’. Or has it?


To be sure, the hue and colour of US/China/EU trade tensions, Brexit, EU/Eurozone gridlock and China’s painful economic transition all look very much as they did in Q4. That said, the sharp back peddling from the Fed, ECB and to a certain extent Bank of Japan, along with ‘dovish turns’ from RBNZ, RBA and BoC, as well as a raft of downward forecast revisions from central banks, governments and supranational institutions has seen any residual ‘optimism’ from the early 2018 period put to the sword.


But in spite of that narrative, this has clearly prompted considerable relief in many asset classes, be that equities, credit and indeed a broad swathe of EM assets. There is still a strong sense that this owes  as represented by falling government bond yields, with 20% of all bonds in issuance with a negative yield as of the end of Q1, which in turn underpins a renewed ‘reach’ for yield/income and returns. The rationale for this relies on a highly debatable assumption that the worst of incoming economic news had already been discounted, and an expected resumption of central bank largesse (as well as hopes of a US China trade ‘deal’). In no small part, this can  central banks the latter should be a point lesson in being ‘careful what you wish for’.


 seemingly at odds with asset price performance in a number of cases. To take but two examples, there  for much of the quarter, and likewise Leveraged Loan  since November, according to Lipper reports, and this despite strong performances in index terms. The sharp reversal down in volatility indices across  disturbing rather than reassuring trend, even if it has  as it has probably owed everything to uncertainty and  the spike in bond and equity market volatility in the immediate aftermath of the ‘dovish’ March FOMC meeting underlined just how fragile markets are. The market and media around the inversion of parts of the US Treasury yield curve and the risk that it presages a recession was rather too binary, and narrow in its focus, particularly the ‘conspiracy theory’ type chatter which asked ‘what does the Fed (and latterly the ECB) know that we do not know?’


8 | ADMISI - The Ghost In The Machine | March/April 2019


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