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Global Markets Overview – September 2019


September 26, 2019

In September’s edition of the Global Markets Overview, we revisit our bond outlook in light of market moves.

In this month's Global Markets Overview:

  • In this month's issue we highlight recent moves across the major developed bond markets, explore the reasons behind these shifts and discuss economic conditions relative to what markets are pricing-in.
  • Since the start of September there has been a broad-based increase in nominal bond yields. Ten-year bond yields within the U.S., the U.K., Germany and Australia have risen 30bps, 25bps, 21bps and 23bps, respectively. However, yields remain far below where they stood at the beginning of the year.
  • At the beginning of September, U.S. 10-year nominal bond yields stood at around 150bps. This was consistent with policy rates falling to around 1% by the end of 2021. Our view is that U.S. policy rates are unlikely to fall this far and, therefore, U.S. bond yields will continue to face moderate upward pressure in the shorter term.

Monthly overview

  • The US Federal Reserve has cut rates by 25bps for the second time this year (with policy rates now between 1.75 – 2.0%). The Fed noted the lack of inflationary pressures, slow business investment growth and a struggling exports sector as the primary reasons for this move. The Fed stated that it is willing to cut rates even further if economic conditions weaken further. It is noteworthy that the US bond market is pricing-in roughly a further 50 - 75bps in Fed policy rate cuts.
  • Mario Draghi, The President of the European Central Bank, introduced a fresh round of monetary stimulus in an effort to bolster growth and inflation expectations. He relaunched a quantitative easing programme which will purchase $20bn of bonds a month, cut the main deposit rate from -0.4% to -0.5% and introduced a third round of targeted longer-term refinancing for banks (TLTRO). As well as these stimulus measures, notable in Mr Draghi's remarks was the emphasis placed on the importance of fiscal spending and the associated limits of monetary policy from here.
  • The Bank of Japan has stated its intention to ease monetary policy further by reducing policy rates lower than -0.1% and taking its deposit rates into negative territory.
  • The House of Commons in the UK passed a law last forcing Prime Minister Johnson to seek a delay on Britain's departure date by three months if the government failed to secure a deal with the EU by 31st October. In addition, Parliament also rejected the government's proposal to hold a snap election in October to break the current impasse in Parliament.

Our Five-Year Outlook

A summary of our updated Five-Year Outlook is provided below:

  • First, over the next two years, we continue to forecast that the Eurozone, UK and Japan have the highest risk of recession. However, for the US we think monetary easing so far has been enough to stabilize economic growth at average levels. Over five-years, our outlook of downside risk being greater than upside risk is unchanged.
  • Second, developed world central banks started the year with relatively limited firepower via their monetary policy to offset any shocks that arise – this situation has worsened given the easing of financial conditions this year, especially the significant fall in US bond yields.
  • Third, relative to our medium-term outlook, we believe valuations for growth-related assets are still high and expect low returns on average over five years, which would put pressure on savers' wider financial positions.
  • Finally, achieving investment return targets – and hence meeting savers' expectations – is expected to be difficult in this environment.

Five portfolio priorities for a surprise-free 2019/2020

  • Diversify
  • Reduce unrewarded risks
  • Macro & dynamism
  • Innovate through alpha
  • Innovate to find diversity, e.g., China now offers a new and diversifying set of assets for investors
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