Wednesday 23 January 2019 by Guest Contributor Opinion

Risk off, risk on, risk off

Markets are all over the place, down one day, up the next. Mark Bayley Head of Institutional Fixed Income discusses some of the major political and economic influences as well as the best performing US bonds to date. As Mark would say “Tin hats on”
wire Bayles 24 January


There was finally something worth reporting on Brexit, as Labour put its solutions on the table on Tuesday night.  Jeremy Corbyn proposed a series of votes in parliament attempting to prevent an economically damaging no-deal Brexit.  Interestingly, one of these choices is a new national referendum.

If Corbyn does throw his weight behind another ballot, it has a decent chance of getting up; there are already about 10 Tories that also want another referendum.  In an emailed statement, “Our amendment will allow MPs to vote on options to end this Brexit deadlock and prevent the chaos of a No Deal…   …It’s time for Labour’s alternative plan to take centre stage, while keeping all options on the table, including the option of a public vote.”

Another line of thinking believes that Corbyn’s move might just play into Theresa May’s hands.  It may solidify support from pro-Brexit Tory hardliners that could decide that the deal she negotiated is the preferred option than risking a re-run of the referendum that could reverse the decision of 2016.


On Monday the data dump from China provided little in the way of surprises with the GDP printing at 6.4% – in-line with consensus; that was its slowest growth rate since 4Q09.  Whereas Retail Sales at 8.2% (cons. 8.1%) and Industrial Production at 5.7% (cons. 5.3%) beat expectations, Fixed Asset Investment at 5.9% (cons. 6.0%) was slightly worse than expected.

Trump couldn’t resist and tweeted:  “China posts slowest economic numbers since 1990 due to U.S. trade tensions and new policies. Makes so much sense for China to finally do a Real Deal, and stop playing around!”

In what has been called an unusual seminar of China’s top leaders, President Xi Jinping stressed the need to maintain political stability in new signs the ruling party is growing concerned about the social implications of the slowing economy.  Bloomberg reported that Xi told a “seminar” of top provincial leaders and ministers in Beijing that the Communist Party needed greater efforts “to prevent and resolve major risks…   …The party is facing long-term and complex tests in terms of maintaining long-term rule, reform and opening-up, a market-driven economy, and within the external environment.”

US investors came back on line after their long weekend and were a bit more cautious.  The Financial Times reported that the US has cancelled a trip by China to Washington for preparatory discussions on trade, which further highlights the difficulties of reaching a deal by March.  This report was denied by presidential adviser Lawrence Kudlow but markets were still spooked.

US equities regained some losses after Larry Kudlow’s comments but still finished down 1.2-1.9% at the close Tuesday night.  European equities bourses were all down 0.4-1.0%.

IMF downgrades global growth

Another warning on global growth was issued by IMF, as the organisation cut its forecast for the world economy, predicting it will grow at the weakest rate in three years in 2019.  This was its second downgrade in three months, driven by softening demand across Europe, fresh trade tensions and volatility in financial markets.  The IMF is now forecasting global growth at 3.5% in 2019, lower than both the 3.7% predicted in October and the rate in 2018.

The IMF stated, “The world economy is growing more slowly than expected, and risks are rising.”  Among major economies, one of the IMFs biggest revisions was for Germany now forecast to hit just 1.3% in 2019 (down 0.6ppt from October) and France is now at 1.6% (down 0.3ppt from October).

The IMF also warned that the US will need to address its budget deficit.  In an interview on Bloomberg TV, Gian Maria Milesi-Ferretti, deputy director of the IMF’s research department said, “In the US we have what we call pro-cyclical fiscal policy, we have the economy virtually at full employment but a large fiscal deficit and that is something that will have to be addressed.”

Best performing US bonds to date

They say every dog has his day and the Bloomberg headline, “Dogs of the U.S. Corporate Debt Market Are Its Newest Darlings” caught my attention.  Bloomberg noted that the US corporate debt rated-BBB – the worst performing in the investment grade (IG) space in 2018 – is the standout performer early in 2019.  BBB-rated corporate bonds have returned 0.8% in January, compared with the 0.5% average for the IG asset class.

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