Following a torrid last quarter of 2018, markets experienced stellar returns across the board after the US Federal Reserve (Fed) rowed back from an ‘upward only’ trajectory for interest rates, responding to a slowing global economy. The change in investor sentiment was supported by solid corporate earnings results in January and positive noises out of the US suggesting that a resolution to the US/China trade war may not be far away. Those assets that led the market down in the final quarter of last year largely led the market back up in the first quarter of 2019. However, against a backdrop of a further deterioration in economic data, many defensive assets, such as US Treasuries and the more defensive parts of the equity market like utilities, still made gains over the quarter.
The Fed, which historically has ignored the wider global economy when setting interest rate policy, balked at further rises when faced with a material slowdown in China, the world’s second largest economy. Forward guidance went from suggesting two further interest rate rises in 2019 to none as the Chair, Jerome Powell, promised to be “patient”. US Treasury yields, having fallen in the previous quarter on fears of recession, fell even further even though equities rallied, with the US stock market recording its best quarter since 2009 and the strongest start to a year since 1998.
The Fed’s change of stance was supportive of markets globally, despite weakening growth being recorded in many regions. The European Central Bank downgraded growth forecasts for the Eurozone and, as widely anticipated, signalled that they would not be raising interest rates until the end of 2019 at the earliest. The yield on the 10-year German government bund fell back into negative territory, something last seen at the start of 2016. Companies took advantage of the unusual market conditions with LVMH, a French luxury goods manufacturer, and Sanofi, a French pharmaceutical company, issuing corporate bonds with negative interest rates, with issues being well covered. Italy fell into recession, defined as two quarters of negative growth, whilst the manufacturing Purchasing Managers Index (PMI) for the Eurozone, a survey of company trading conditions, fell below 50, indicating economic contraction. The German economy was a key contributor to this fall and, whilst its weak growth has been attributed to a number of one-off factors, such as the introduction of new car emissions tests leading to a fall in car production, and very low levels of water in the River Rhine disrupting the transportation of goods, weakness in one of Germany’s key export markets, China, is likely to have been a major (and possibly longer lasting) factor.
Domestic Chinese ‘A’ shares roared ahead despite the economy slowing. Full year GDP came in at 6.6%, down from 6.8% the previous year, although many investors remain sceptical about the data, with manufacturing PMIs pointing towards contraction. Even so, markets were spurred on by the Chinese government easing policy through higher public spending, tax cuts and the lowering of bank reserve requirement ratios. However, the stimulus was not on the scale to which investors have become accustomed, as the government tries to get to grips with a credit bubble. President Trump postponed the date set for US tariff increases on Chinese goods as a drip feed of reports suggested that trade negotiations were going well, with only an agreement on how to enforce the deal outstanding. The icing on the cake came with the announcement that the weighting of Chinese domestic shares in the MSCI Emerging Market (EM) index was to be lifted to 3.3% from the current level of 0.7%.
Within the wider EM universe, Asian countries followed China’s lead and performed well, making EM performance strong overall. However, Latin America lagged despite a substantial rally in the oil price as political problems continued. Brent crude oil rose from just under $54 a barrel to over $68 a barrel by quarter end, driven on by hopes of a recovery in growth as central banks around the world postponed interest rate rises and OPEC (Organisation of the Petroleum Exporting Countries) constraining supply to support prices.
UK assets performed well despite no conclusion to Brexit negotiations, as the 29 March deadline for leaving the European Union was pushed to 12 April.