Macro Matters: three factors behind market malaise

Idiosyncratic risks stories in countries such as Argentina resurfaced, the UK’s parliament was suspended over Brexit chaos and Italy witnessed a political crisis of its own, although a government seems in sight now.

Investors’ search for safety pushed core bond yields to unprecedented low levels, with yield on the 30-year German bunds turning negative for the first time ever. The US yield curve inverted for the first time since 2007, with yields on 2-year note rising above those on the 10-year bond.

There are three main factors, according to Amundi, behind this summer malaise.

Pascal Blanque, group chief investment officer, at Amundi Asset Management, explains:

“1) Markets do not like policy uncertainty and ambiguity, and both have increased. Geopolitical risk spillovers on the economic outlook are evident. Recession worries are overdone in the US (we don’t expect a recession in the next 12 months) and we should not overestimate the role of the yield curve inversion as a harbinger of recession, in the era of unconventional monetary policies.

“2) The risk of escalation of trade war turning into a currency war is looming as both the US and China fight for global hegemony. The yuan weakening above the 7.0 mark, the first time since the 2008 crisis, has been seen by the US administration as an attempt by the Chinese to manipulate currencies. However, we don’t share the view that China will manipulate the currency proactively. Authorities are only seeking to stabilise the exchange rate to offset the negative impact of tariffs on the competitiveness of Chinese exports.

“3) Political pressures on Central Banks are mounting. The Fed has delivered a rate cut and ended quantitative tightening. But the manner in which Trump has been pressurizing Jerome Powell to reduce rates is a challenge for Fed’s independence, more so in light of the 2020 Presidential elections.”

What are the investment implications of these elements?

The fall in core bond yields is a reflection of a complex scenario, explains Blanque.

“The narrative seems to be changing from ‘bad news for the economy is good news for risk assets,’ supported by ultra-dovish central banks to ‘bad news may start becoming bad news,’ with markets pricing economic downturn.  As a result, markets and even politicians expect central banks to intervene more aggressively, but markets may have gone too far in pricing policy actions as global growth could be stronger than expected.”

In the short term, central banks may help to extend the cycle, but the power of these new measures will be lower than in the past, if not accompanied by consistent fiscal support. But we are at a very early stage, the amount is limited and not coordinated at the EU level.

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