Par Marilyn Watson, Head of Global Fundamental Fixed Income Strategy au sein de BlackRock
- Idiosyncratic risks and uncertainty stemming from political events have continued into 2019 without missing a beat at the turn of the year, while markets ended 2018 in a flurry of volatility. As global leaders meet in Davos, the US government shutdown has entered its 34th day, the outcome of Brexit is even less clear, the ‘yellow vest’ movement continues in France and the trade tariff and protectionism spat between the US and China is far from resolved.
- Recent economic data has continued to highlight a growing dispersion between regions. In particular, the US appears to be powering ahead while growth in Europe has weakened, including today’s eurozone composite PMI data release which fell to 50.7 in January from 51.1 in December. In its latest World Economic Outlook Update1 the International Monetary Fund revised down its forecast for global growth and cut the forecasts for Germany, France and Italy.
- As expected, the ECB today maintained key interest rates at current levels, including the negative deposit rate of -0.4% and main refinancing rate at 0%. It also retained language around not expecting to change them “through the summer of 2019”. The ECB has finally ended its asset purchase programme, which began in 2015, and retained forward guidance relating to the reinvestment of maturing bonds.
- During the press conference, President Draghi noted (another) move to the downside in economic outlook risks. He reiterated the need for governments to push through structural reforms and take measures to increase their long-term growth potential. We had been looking for any new information on targeted longer-term refinancing operations (TLTROs). Draghi acknowledged they were mentioned but no decision was made by the committee.
- We believe the ECB will maintain a cautious and measured approach to removing its very loose monetary policy stance. In terms of positioning, we are short the euro, retain a small long position in Italian government bonds, have been tactically trading German Bunds and hold select positions in European corporate bonds.
- The US Federal Reserve will announce its monetary policy stance on 30th January. After a steady cadence of quarterly hikes in 2018, this will be keenly watched by market participants hoping for signals on its balance sheet policy, future operating framework and potential path for interest rates in 2019. In our view, the Fed will become increasingly data dependent. We are long or overweight the belly of the US Treasury curve and retain our preference for assets that offer an attractive risk-adjusted carry.
- One important theme for investors that we pay close attention to, a consequence of the Fed’s normalisation path as other developed market central banks have retained their very loose monetary policy stances, has been the huge increase in hedging costs for many non-USD investors. Conversely, many euro or yen denominated assets, for example, offer an attractive pick-up when hedged back to US dollars.
- Turning to Japan, the Nikkei manufacturing PMI fell to 50.0 for January, down from 52.6 in December. A reading below 50 signals contraction. We expect the Bank of Japan to retain its easy monetary policy stance for some time with inflation remaining relatively subdued.
- Finally, we continue to favour certain spread assets for income generation. We remain tactical in corporate bonds and securitised assets, with a strong focus on bottom-up fundamentals.
- Source: International Monetary Fund 11th January 2019