The World In A Week – Central Bankers Pause for Thought
This week global markets started to recover from an agitated final quarter of 2018 by inching upwards. The MSCI All Country World Index posted a gain (+1.14%), primarily led by the United States’ stock markets which also recorded a gain (+1.88% as measured by MSCI USA). A similar picture was also reflected in equity returns in Europe and the Emerging Markets who also recorded gains (+0.26% and +0.29% respectively as measured by MSCI).
Fixed Income also staged a comeback. The Bloomberg Barclays Global Aggregate Index returned +0.91%, and High-Yield Bonds returned +1.09% as measured by Bank of America Global High Yield Index. (All figures cited are in GBP)
In light of the apparent rebound, the world’s Central Bankers are now backtracking from monetary tightening. The most striking reversal was made by Federal Reserve Chairman Jay Powell on the 30th of January, where he announced he would stop further interest rate rises due to slowing global growth and inflation expectations.
Powell’s U-turn was closely followed by the Governor of the Reserve Bank of Australia, who announced that interest rates would be moving down, rather than up. The Governor went on to reference the ongoing trade war between America and China as a risk to Australia.
Australia is unique having experienced an unprecedented 25 years of uninterrupted economic growth. However with a frothy housing market and slowing demand for the commodities it sends north, many economists speculate that this streak may soon come to an end.
On Wednesday this week the reversal theme extended to the Emerging Markets with the Reserve Bank of India cutting rates by 25 basis points. Many speculate that Governor Shaktikanta Das was put under pressure to stimulate the economy by Prime Minister Narendra Modi – drawing a parallel with the pressure President Trump put on Governor Powell to ensure “his” economic expansion continues.
On the same day and closer to home, the Bank of England lowered its forecast for UK economic growth this year from +1.7% to +1.2% – citing Brexit uncertainty and the slowing global economic environment. Governor Carney also signalled that UK interests rates would remain on hold, despite constrained inflation expectations and a tight labour market.
Given the week’s events, we believe the uncertain economic environment continues to validate our decision to move to neutral on equity risk across our model portfolio range.