25 March 2019
Narrow ‘goldilocks’ path for the US
At the end of last year, we pointed to global growth fears that would likely require policymakers to intervene further to get global growth back on track, and this appears to be playing out, with all three major central banks enacting supportive policy in 2019.
The US Federal Reserve has hit the pause button on their tightening cycle, and in the wake of tighter financial conditions which hit markets late in 2018, this pause has been interpreted by markets as a positive for risk assets. But the performance of traditional hedging assets, such as gold and US Treasuries, indicates that investors haven’t fully bought into the risk-on story, and are hedging their bets.
While the tailwinds provided by a dovish Fed are clear to see, and are indeed priced into the market, we fear the US economic data may continue to deteriorate. Even if markets are wrong on that, they are vulnerable to a hawkish surprise, which could come from continuing economic strength. From this starting point the ‘goldilocks’ path looks narrow to us.
China: missing the ‘big bang stimulus’?
In 2018 China posted its worst annual growth figures since 1990, and stock markets performed poorly. But this year has seen a reversal in fortunes for equities. A sentiment boost from positive signs on a temporary trade truce with the US has helped, but it is worth remembering the vastly more important role of infrastructure spending by the Chinese government.
On this front, the recent National People’s Congress saw some meaningful fiscal stimulus announced, as well as continued accommodative monetary policy. But this is all a far cry from the ‘big-bang’ stimulus seen in recent years. Have markets priced in a ‘big-bang’ that won’t come?
ECB: minimal ammunition
Meanwhile, the situation in Europe is troubling, with Germany narrowly avoiding a recession through government stimulus, while Italy is in recession. But the European Central Bank didn’t begin hiking when they had the chance, and now has minimal ammunition left given they remain in negative interest rate territory.
In recent weeks, they have certainly tried to intervene, with outgoing ECB President Mario Draghi delaying the first post-Eurozone crisis rate hike and embarking on a third round of Targeted Long-Term Refinancing Operations (TLTRO), allowing banks to fund loans they then extend to the real economy at very low rates of interest.
Helping banks, especially in the Euro periphery, roll over their existing TLTROs will help them avoid a so-called cliff edge. But this is all more damage control than stimulus, and markets have not responded as the ECB may have hoped.
It is likely that we will get some clarity on the longer-term direction of markets in the coming weeks, but in the meantime, we are closely watching corporate behaviour, as how corporate decision makers position their businesses goes a long way to shaping economic outcomes.
We are also focused on the direction of central bank policy. For how long the doves remain in vogue remains to be seen, but markets have built up a tolerance for the drug that is easy money and weaning them off will be no easy task.
The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a reliable indicator of future results.
These materials are provided for information purposes only and are intended only for the person or entity to which it is sent.
These materials do not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities or investment product.
Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. They are valid only as of the date indicated and are subject to change without notice.
This material was created by Fidelity International. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
This content may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organisation that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice personal recommendations based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG, authorised and supervised by the Swiss Financial Market Supervisory Authority FINMA. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German institutional clients issued by FIL Investments International – Niederlassung Frankfurt.
In Hong Kong, this content is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road, Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C. Customer Service Number: 0800-00-9911#2.
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.