Market review: Credit markets with space in the sun
The performance of global equity markets was mixed in September but with a positive undercurrent. US technology stocks weakened intermittently, while Japan was very strong for no particular reason. Of note is the strong recovery of problem children Argentina, Turkey and Russia, where the fundamentals began to stabilise in parts. In addition, we saw a technical market correction of the price drops, which was overdue. The strong recovery of the Chinese stock markets is also noteworthy. The first effects of the stimulus measures (to mitigate the trade war) by the central bank and the government in Beijing were felt. A somewhat weaker US dollar also had a calming effect. In particular, this relieved some tension in various stricken emerging markets. On global credit markets, all segments were very encouraging: high yield and emerging markets in particular were very solid, with credit spreads narrowing by up to 30 basis points. On the other hand, interest rates rose sharply worldwide, the reasons being stable growth and global inflationary (albeit no more than moderate) pressure. The huge supply of US sovereign bonds as a result of rising debt and the Fed unwinding its balance sheet also pushed up interest rates. Interestingly, the general behaviour of bond markets has changed: better economic data and higher inflation are immediately met with rises in interest rates, much more so than in the first half of the year. Sharp rises in the price of crude oil and a stabilisation in the price of copper supported the reflationary environment. Precious metals were the only stragglers; gold trended sideways, while silver was even weaker.
Our macro model signals for equity and credit markets did not change much in September. The signals for US equities remain positive and those for Japan went from neutral to positive. The scores for US credit markets also remain positive, in both the IG and high yield segments. Europe and emerging markets are neutral but the picture for EM IG is positive. Increases and decreases in leading indicators (price of copper, gold/silver ratio, transport indices) have cancelled each other out. The increasingly restrictive monetary policy pursued by central banks is continuing according to plan. This, coupled with rising national debt, is exerting moderate but constant upward pressure on interest rates. Then there is also a global trend towards higher inflation, which is pushing up interest rates as well. Very high consumer confidence and rising crude oil prices support this reflationary trend. China remains the exception; the central bank there is increasing liquidity in an effort to reduce potential stress due to the trade conflict. A somewhat weaker US dollar comes as a welcome relief for many emerging markets. It provides an opportunity for the global economic upturn to spread a little more evenly over the regions once again. Yield curves remain steep, which confirms the favourable global environment. Only a further distinct flattening (lower long-term interest rates coupled with rising short-term rates) would signal stifling of the economy by central banks. Our trend model also confirms the fundamental assessments – for equities and interest rates, as well as credit spreads.