Monetary policy disruption was on full display last week: The U.S. Federal Reserve (Fed) announced a momentous change to its normalization plan, the yield curve inverted and sparked investor concerns, and a noted Fed critic was nominated to the central bank’s Board of Governors.
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The Federal Reserve (Fed) held the target range for the U.S. federal funds at 2.25%-2.50% at its meeting on Wednesday. This outcome was in line with market expectations. In addition, the Fed indicated they do not expect to hike rates again in 2019 and only expect one hike in 2020.
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Artificial intelligence (AI), quant funds, high-frequency trading, big data — these terms get thrown around a lot these days and can create confusion and uncertainty. (Case in point: Tesla CEO Elon Musk has said that AI is more dangerous than nuclear weapons, with Facebook CEO Mark Zuckerberg calling such statements “pretty irresponsible.”1) Beyond such dramatic statements, it’s clear to see that quants and high-frequency traders (HFTs) account for more than half of all US equity trading. How does all of this fit into the investing world as we see it?
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The latest installment of the Brexit drama offers good and bad news for investors in U.K. assets and beyond: The good news is the risk of a “no deal” Brexit has receded, but the bad news is it’s still a possibility and the timeline toward resolution is now more extended. This means that persistent uncertainty is likely to continue to weigh on the U.K. and wider European economies, and may elevate the volatility of U.K. asset markets, particularly the currency.
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The United States has always had a difficult, complicated relationship with the concept of central banks. Early on, critics sought to prevent the establishment of a U.S. central bank, while today, politicians in the U.S. and around the world seek to use central banks as tools to further their policy aims. In my view, central bank independence is critical to their ability to counteract the economic effects of geopolitical chaos.
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There is an old Chinese proverb that states, “When the winds of change blow, some people build walls and others build windmills.” In other words, some people embrace change while others fear it. I’ve come to the conclusion that the speed of the change has much to do with how a change is received. Just look at the past week, when we saw abrupt changes in the direction of the wind for central banks, followed by largely negative reactions.
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Two key risks – trade and central bank normalization – have had an outsized impact on global stocks for more than a year (sometimes positive and sometimes negative). This past week saw developments in each of these key issues.
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An informal Invesco poll of North American institutional investors recently revealed that geopolitical risk was a top concern for 2019. And they’re not the only ones worried: European Central Bank President Mario Draghi recently noted that the risks to the downside have increased, blaming, among other things, “the persistence of uncertainties related to geopolitical factors and the threat of protectionism…” In his annual letter to investors in January 2019, Seth Klarman of Baupost warned of the threat of geopolitical disruption: “Social frictions remain a challenge for democracies around the world, and we wonder when investors might take more notice of this.”
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Last week was momentous for one specific reason: The Federal Open Market Committee (FOMC) released minutes from its January meeting, which detailed the significant “about face” that the Federal Reserve (Fed) has made over the last few months. In my view, the FOMC’s insights, along with apparent progress in U.S.-China trade talks, could enable stocks to move higher in the short term – but I’m also wary of negative implications that could lie beneath the surface.
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The fourth quarter of 2018 was tough on investors in European equities, and uncertainty appears to be rising as we enter 2019. But the Invesco International and Global Growth team believes that environments like these can result in great prices for attractive businesses. In fact, we haven’t seen valuations in Europe this low since 2013. So, what is our outlook for Europe, and where are we finding opportunity?
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From key data releases to international tensions, there are five issues that I’m watching closely this week. Before I detail those, let’s review what we’ve learned in recent days that could impact markets going forward:
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In Greek mythology, the “sword of Damocles” is a powerful morality tale. King Dionysius is a leader who grows weary of a young sycophant, Damocles, who is constantly extolling the benefits of being king. To teach Damocles a lesson about the pressure and insecurity that comes with leadership, Dionysius allows him to sit on the throne for a day – but over the throne, the king has suspended a large sword, hung by a single hair. Damocles quickly learned what it feels like to be a leader who exists in imminent danger and jeopardy.
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The biggest American football game of the year was played last night, and for the first three quarters, it looked as if both teams forgot how to score a touchdown. But great teams find a way to win, even when their tried-and-true game plan seems to be faltering.
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One of the key themes I’m watching for in 2019 is a continuation of the equity volatility we saw in 2018. The return of volatility may have caught some investors off-guard, having grown complacent in the relatively docile 2017.
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Last week was momentous as experts in Davos warned about the dangers of debt, more signs of a European slowdown emerged and the longest government shutdown in U.S. history came to an end. In today’s blog, I discuss what we learned last week – and highlight eight things to watch during the final week of January.
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Last week saw government dysfunction on full display in several different countries. While politicians in the U.K. and U.S. continued to make headlines, expectations for lower economic growth emerged in a report from the International Monetary Fund.
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On Tuesday, Parliament rejected U.K. Prime Minister Theresa May’s Brexit Withdrawal Bill by a 230-vote margin – the largest defeat of legislation in nearly 250 years, when Parliamentary records began.† That the defeat exceeded consensus by as much as 100 votes reflects the depth and breadth of dissatisfaction with May’s Brexit plan. Many Members of Parliament (MPs) fear it could further undermine the economy, contribute to secession in Northern Ireland or Scotland, or might not confer the freedom for which Brexiters campaigned in the referendum.
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There has been no shortage of drama across the macroeconomic and geopolitical landscape so far in 2019. However, it appears that investors may be tuning out much of the political theatre around them. Which storylines are moving markets now, and which may become more integral to the plot in the weeks ahead?
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Students of history may recall the War of the Roses, which was waged more than 500 years ago. It was an epic battle between two rival branches of the English royal family that both had claims to England’s throne – the House of Lancaster, represented by a red rose, and the House of York, represented by a white rose. While the House of Lancaster ultimately won the War of the Roses, by some measures there was no real winner. The war lasted for many years and resulted in very significant damage to both houses. In fact, by the end of the war, the male lines in both houses had been eliminated.
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At the start of 2018, I warned about two significant forms of disruption that posed risks to markets: geopolitical disruption and monetary policy disruption. The solution to the global financial crisis – experimental monetary policy – had created greater wealth inequality, which had led to geopolitical disruption, and the situation was poised to worsen in 2018. This experimental monetary policy, especially large-scale asset purchases, was beginning to be unwound – and that was an experiment in and of itself which also had the potential to cause disruption.
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