G10 Macro Rates Monthly View
With Shayne Dunlap, Co-Portfolio Manager
Normality returns, or has it?
October brought a welcome period of “normal” markets. Improved sentiment on the two big pressing issues, Brexit and US China trade talks, allowed some upward movement in curves and yields from their stretched lows. This created a more balanced environment where buyers and sellers appeared in more equal measure and market volatility reduced.
The UK reached a draft agreement with the EU and the Brexit bill passed in principle through the UK parliament, and the US-China trade talks were looking more positive with a signing expected at the APEC Conference in Chile. We end the month with resolution of both issues being called into question.
The risk of hard Brexit has been significantly reduced, however the fast track timetable of an October 31 departure was stopped in its tracks, forcing all parties to agree an election on December 12th. The new issue being elections in this era are highly unpredictable and it is not certain that the Conservatives Party will get the required majority for a smooth implementation of the latest withdrawal agreement bill (WAB).
Chile has cancelled their hosting of the APEC Conference and conflicting messages of progress continue to come from both China and the White House. This is happening at a time when the market would expect further alignment within the feedback. It calls into question any lasting or meaningful progress other than a shallow phase 1 deal, and thus the world takes a deep breath again and hopes for something more tangible.
The US rates markets are on tenterhooks for fresh developments in the momentum of the US economy, while their equity counterparts are more positive with the S&P exploring new record highs. Has the Fed done enough with a 3rd “insurance” cut in 4 months, to ensure the longest recovery in post-war history continues, or is the American consumer going to be pushed down by slowing world GDP? On the positive side, there appears to be a glimmer of a bottoming in the global PMI’s, albeit from a low base.
The month also saw the changing of the guard at the ECB, Lagarde taking the helm from Draghi. He did “whatever it took” to hold the European dream together. We think Lagarde’s’ policy options are severely limited with regards to further monetary stimulus. She is best to use her political guile to try extract some fiscal assistance from the 19 nations. Easier said than done considering the pre-emptive pushback from Germany towards breaking their black budget rule.
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