The changes in tone from central banks drove global financial markets in June. The Bank of England and the European Central Bank appear unlikely to follow the path of the Federal Reserve in hiking rates this year. Political uncertainties in the UK grew in June following the Conservative party failing to achieve a majority just weeks before the beginning of already uncertain Brexit negotiations. In addition, questions linger over US economic policy and the ability to implement legislation.
Economic prospects in the Euro Area appear to be improving with GDP growth up to 2% this year, although inflation remains below target. The US has continued to grow, with an annual GDP growth rate of around 2%, whilst the UK has outperformed post-Brexit expectations, albeit with signs of a slowdown ahead. Emerging markets have benefitted from loose global monetary policy conditions and accelerating growth. In turn this has benefitted corporate profits, with earnings rising above the stagnant conditions of the past 2 years, up over 10% year-to-date in the US, and beyond this in Europe and Japan.
The benign conditions that have prevailed in markets through the past six months continued into May, with most risk assets producing positive returns. Equity markets again produced the best returns, led by the UK, Europe (especially peripheral markets) and Asia, but bond markets also made solid progress, as yields drifted lower and credit benefitted from a favourable corporate backdrop. Perhaps the most notable features, however, were a further slide in the US dollar, which fell 2.2% in May on a trade weighted basis, taking its fall to 6.1% from its early January peak and reversing all of the post election surge; as well as a further drop in the oil price in the face of stubbornly high global inventory levels and evidence of surging oil shale production in the US. Also notable was the continuation of extraordinarily low levels of volatility across markets, with the VIX ‘fear’ index hovering at ten year lows, punctuated only very briefly in May by concerns that the Russia/Trump scandal could lead to a further weakening of the President and his ability to implement some of his reflationary and business friendly policies and even lead to his impeachment.
In another good month for risk assets generally the pattern of performance and market leadership has shifted significantly. Following Donald Trump’s election victory in November the US equity market led the world up sharply, with the ‘reflation trade’ accounting for much of the rise. However growing evidence that winning Congressional approval for big policy initiatives such as tax cuts and reforms, and huge spending on infrastructure will be very difficult has meant the US market has stalled. Although the S&P 500 returned 1.0% in April it has traded sideways for two months. At the same time the USD has weakened against all major currencies on a trade weighted basis.
Despite a mid-month wobble in the US equity market, it was another benign month overall for equity markets and most risk assets made further upward progress, continuing the pattern of performance since Trump’s election success. Volatility remained remarkably low, and equities again outperformed bonds. The most notable moves included a change in leadership within equity markets, with Europe meaningfully outperforming the US, credit marginally outperforming sovereign bonds (which posted flat or negative returns), and a renewed slide in the US dollar against most currencies, leaving its trade weighted index down by 1.8% year-to-date. Despite further evidence of strengthening global growth, commodity markets were generally weak, notably the price of WTI oil declined by 6.3% over the month. A combination of accelerating growth and a weaker dollar helped emerging markets to another strong month, leaving them as the best performing equity market year-to-date (posting a total return of 11.4%).
The broad pattern of market performance since Trump’s election victory continued in February in a period notable for its particularly low volatility, with the Vix ‘fear’ index now at its lowest levels since the financial crisis. Equities, led by the US, significantly outperformed bonds again; global developed equities returned 2.8% in February compared with a return of 0.4% from global bonds, taking the year-to-date outperformance of equities to 3.9%.
The early weeks of 2017 in financial markets have been a sharp contrast to the same period in 2016, when markets fell sharply on fears about China’s slowdown and currency weakness. This year markets have continued their post-election pattern, rising on expectations of ‘Trumpflation’, and higher growth and corporate profits. Equities, again led by the US, have continued to outperform bonds, with the MSCI World index up 2.4% in January while global government bonds were up 0.9%. However, it was notable that global emerging markets, which underperformed markedly in the aftermath of the election amidst fears of trade protectionism and a strong dollar, recovered strongly, with the MSCI Global Emerging Markets index up 5.5% for the month, helped by currency gains and strong rises in Asian and Latin American markets.
A year that witnessed political power ebb away from centrist politics and towards fringe populism and nationalistic ideologies culminated in the election of Donald Trump – the Republican Party’s far-right, nationalistic, anti-trade and immigration, property mogul nominee. His triumph over Democrat Hilary Clinton, who many saw as the encapsulation of the political establishment, reflected the electorate’s disenchantment with such politicians and the inequality that has resulted from their pro-trade and immigration policies of the past decade.
Throughout October, all eyes were on the build-up to the US election. Markets broadly followed the ebbs and flows of each candidate’s campaign momentum. As such the announcement that the FBI was to re- open its investigation into then candidate Hillary Clinton’s email account led to a wave of risk adverseness and portfolio hedging throughout global markets. The S&P 500 index lost 1.9% over the month, whilst European stocks lost 1.0%.
The modest returns seen in the majority of markets over the month masked some sharp moves over the same period. In most cases these were triggered once again by central bank policy decisions, as well as moves by OPEC and Russia to curb oil production.
August proved to be a particularly quiet month for markets, with low levels of volatility across equities and bonds, and little by way of significant news flow. Overall the ‘risk on’ environment of July, post the UK Brexit referendum, broadly continued in August: most equity markets rose modestly higher, with emerging markets leading the way and adding 2.5% in the month.