2019: markets fly in Q1 as central banks lift investor sentiment

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Investors rediscovered their risk appetite after a weaker economic backdrop led major central banks to take their foot off the (monetary policy) brake or even step on the accelerator gently. Assets benefited across the board.

Investor sentiment recovered sharply in the first quarter of 2019. All major asset classes rebounded, reversing the late 2018 sell-off (exhibit 1). In particular, the risk-on mood led equities back to near their peaks and market volatility fell towards its lows.

Exhibit 1: Q1 2019 returns – all assets are up

Source: Bloomberg and BNPP AM, as of 29/03/2019

US equities have gained roughly 12% since early January, supported in particular by the decision of the US Federal Reserve to hold off on tightening monetary policy. Indeed, in March, it signalled that interest rates would be unchanged for all of 2019 and that balance sheet reduction will slow from May and stop in September. This dovish tilt also supported EMU and other developed market equities.

In bond markets, US Treasuries did well over the quarter, as did Bunds and EMU ‘peripheral’ bonds. The ECB’s announcement of a new round of targeted longer-term refinancing operations was a major driver. The US yield curve is now basically flat. The spread between 3-month and 10-year bonds inverted in late March, marking the first time in more than a decade (exhibit 2) and reminding investors that the cycle is maturing.

Among currencies, the US dollar did poorly on the Fed’s new policy stance. Sterling gained on both the US dollar and the euro, fuelled by new hopes and expectations around Brexit.

In commodities, energy rebounded from its late 2018 drop. Crude oil was mainly supported by OPEC’s decision to cut output. However, some OPEC members said that given the uncertainties around Venezuela and Iran, further decisions were unlikely before May or June.

Exhibit 2: US fixed income: curve movements in Q1

Source: Bloomberg and BNPP AM, as of 29/03/2019

And what about Brexit and progress on the Sino-US trade talks?

On Brexit, chaos seemingly rules in the UK Parliament. PM May has not been able to get MPs to approve her deal and the government is becoming weaker, especially after a number of defeats and resignations of ministers. Still, the EU granted the UK an extension of the deadline, so that work could be done on a new deal or, alternatively, a no-deal Brexit.

On the US-China trade conflict, the situation appears to have improved, making a deal between presidents Trump and Xi more likely.

Finally, on the macroeconomic side, data showed that the global economy remained on a downward trend. Indeed, concerns arose over manufacturing activity in all the developed countries given after the latest PMI releases. A drop in US housing starts has added to the concerns.

Leading central banks responded to the weaker backdrop with a more dovish stance.

This is an extract from the asset allocation quarterly by the MAQS team at BNP Paribas Asset Management.

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Views expressed are those of the investment committee of MAQS, as of March 2019. Individual portfolio management teams outside of MAQS may hold different views and may make different investment decisions for different clients.

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