Weekly Market Update: Global central banks turning hawkish?

Weekly Market Update: Global central banks turning hawkish?

Mon 18 Jun 2018

Read our full Market Update Week 24

Market Update

Global markets had a second straight week of gains in Sterling terms, again led by US equities (+1.0%, +0.1% in local), with European equities also faring well (+1.0%, +1.5% in local). Japanese equities also gained +0.4%, however UK equities and Emerging Market equities were down -0.6% and -0.9% respectively. UK equities in particular were hit as Donald Trump announced a 25% tariff on a list of strategically important imports from China. In the US, tech stocks drove performance, with Facebook, Netflix, Alphabet (Google) and Microsoft all having good weeks. However financials struggled as the ECB announced that it would be holding rates steady until mid-2019, longer than markets had been expecting, although it did announce it would be ending bond purchases by the end of 2018. This announcement saw government bond yields fall across the board, with German 10Y Bunds yields down -4.6 bps, UK 10Y Gilt yields down -6.0 bps and US 10Y Treasury yields down -2.6 bps for the week. In contrast the Fed raised its interest rate target to 1.75%-2.00% and signalled it expected a total of four interest rate rises in 2018, whereas markets had been expecting three. The Euro fell over the week, with GBP gaining +0.4% and USD gaining +1.4% against the common currency. Oil fell -1.0% and Gold fell -1.5% in USD terms.

CIO Analysis

Last week it was confirmed that global central banks will be adopting an increasingly more hawkish path towards rate normalisation. The Fed signalled that it could hike 4 times this year, and the ECB will be ending QE by December. Traders have already priced these moves in, which is probably why equities have been moving sideways since February. Two points: First, the word “hawkish” is used loosely and in relative terms. With an increase of over $11tr in central bank assets since 2008, liquidity is abundant and it’s still easy to get cheap money to invest and grow the economy. Second, interest rate normalisation is well overdue. No financial system can survive for long if savers who keep money in the bank are not compensated for parting with liquidity. Also, longer term lenders should be getting enough compensation to continue lending. It is on these principles that pension funds survive, and for the last decade of ultra-low rates they have been severely underfunded. Does less accommodation mean the end of the bull market? Eventually, maybe, but let’s not forget that if a crisis ensues, central banks could well turn the taps on again.

David Baker, CIO