Weekly Market Update: Markets mixed as yields curve inverts

Mon 25 Mar 2019

Read our full Market Update Week 12

Market Update

Global financial markets are starting to hint at an impending recession, with Japanese equities down over 3% in Monday’s trading, with other Asian stock markets also down markedly. Further, the US yield curve has inverted and last week 10Y Bund yields fell back into negative territory, although over the week UK and US 10Y yields fell further, down -19.7 and -14.8 bps respectively. Equity returns to the end of last week in Sterling terms are a bit of a mixed picture, with European, UK and US equities down -1.1%, -0.2% and -0.1% respectively. Japanese and Emerging Market equities finished the week up +2.9% and +0.9% respectively, however closed before markets in the US started pricing in the poor economic outlook. Sterling fell -0.6% vs the US Dollar and -0.4% vs the Euro last week. Events are moving quickly on Brexit but whether the UK leaves the UK with or without a deal is far from clear, weighing on the currency. In the commodities space Gold gained +0.9% and Oil gained +0.7%.

CIO Analysis

Brexit is the perfect storm, the confluence of chronic EU design flaws, British exceptionalism, identity politics, economic inequalities and asset misallocation following the 2008 global financial crisis, the opaque commercialisation of social media and growing geopolitical imbalances. It means so many different things to so many people, it is impossible to deliver on its inflated promises. A reversal of the 2016 referendum, conversely, threatens to confirm the suspicion of many that in a modern globalised environment their opinions, and they themselves, remain invisible, forever ostracising them from the body politic. The choice in the referendum was the same as today: Regulatory and trade consensus handcuffs on competitiveness, or the uncertainties of sailing into the unknown?  What is the answer markets and investors are looking for? It is not a Brexit deal or to Remain, but rather clarification on “who is at the helm and what is their plan”? The latter has been in question over the past three years. Reading the weekend press, we get a feeling that the former could also become a source of uncertainty. And this is the essence of investing in British risk assets for the past thousand days: are investors compensated for uncertainty? At current values the are likely compensated for some uncertainty, but not necessarily for the uncertainty of crashing out from the most comprehensive treaty the world has ever seen. And while trying to square the Brexit circle, portfolio managers must not take their eye off the precipitous slowdown of Europe, the risk-off implications as well as the downside risks of uber-dovish central banks, China’s tumultuous economic transition and Washington’s political gridlock anew.  Brexit is a mess and it is not even a top three risk for diversified portfolios. Forecasting the future is impossible. Investors just need to make sure they know their risks and that they are rewarded enough for taking them.

David Baker, CIO