Policy tightening is easing
Last week marked 10 years since the equity market trough which followed the global financial crisis. Since that low on 9 March 2009, global stocks have returned 260% and the S&P 500 400%. As we enter the 11th year of the bull market, it’s valid to ask whether it has further to run.
Bull markets often end because central banks tighten monetary policy to an extent that chokes off the expansion and sparks the next downturn.
But following December’s sharp equity pullback amid concerns of weakening economic growth, the world’s major central banks have shifted away from monetary policy tightening.
Federal Reserve
- The Federal Reserve has moved from “autopilot” to “patient,” and recent guidance suggests that the pause in rate hikes may last some months. Boston Fed president Eric Rosengren, once one of the more hawkish Fed officials, last week said that “it may be several meetings before the Fed has a clear read on whether economic risks are becoming reality.”
European Central Bank
- Just three months after ending its bond purchase program, the European Central Bank cut this year’s Eurozone growth forecast to 1.1% from 1.6% and announced fresh stimulus measures. It pushed out the timetable for its first rate hike, saying it now expects rates to stay at record low levels “at least through the end of 2019” compared with previous guidance for “through the summer.” We expect a first hike in March 2020. The central bank also launched – earlier than expected – a third Targeted Long-Term Refinancing Operation (TLTRO III) consisting of a series of two-year loan auctions to run from September 2019 until March 2021. The program is partly aimed at helping banks roll over the EUR 720bn of existing maturing TLTRO loans.
The Federal Reserve has moved from “autopilot” to “patient"
China’s National People’s Congress
- At China’s National People’s Congress this year’s official GDP growth target was lowered to 6–6.5%, which would be the slowest annual growth rate in three decades. The government is responding with both monetary and fiscal stimulus. Monetary policy will be “neither too tight nor too loose,” but the removal of the term "neutral" echoes the government's recent easing tone and points to accommodative monetary policy ahead. We expect another 100–200bps of reserve requirement ratio cuts this year. On fiscal policy, tax and fee cuts worth some CNY 2trn were announced.
Bank of Japan
- Yutaka Harada, one of the doves at the Bank of Japan, said last week that the scheduled sales tax hike in October could hurt the economy, and that the BoJ should increase monetary stimulus if risks to the economy threaten the achievement of its inflation target. The comments echo remarks last month by former deputy governor Kikuo Iwata, one of the architects of Japan’s QQE program, who advocated abandoning this year’s sales tax hike and committing to boosting government spending permanently with money printed by the BoJ. This doesn’t mean the doves are controlling policy at the BoJ, but it remains the only major central bank still engaged in quantitative easing, and some of its policymakers clearly favor further easing.
The more dovish global monetary policy stance will help support the equity rally, and we remain overweight global equities.
But while supportive policy is necessary, it may not be sufficient. A lot of good news is already priced in, and it may take other positive developments to drive markets significantly higher.
Our base case is for a US–China trade deal to be reached, at least in the short-term, but the risks of a late breakdown in talks cannot be excluded. We also need more signs that the dovish policy stance is having a positive impact on the data – like last week’s strong US ISM services print. And with inflation remaining close to the Fed’s target, we still see one more rate hike this year, which is currently not priced in by markets. With these risks in the background, we also recommend investors protect against potential downside through core bonds, countercyclical positions, and outright hedges for investors who are able to implement them.
Bottom line
Last week marked the 10-year anniversary of the equity market trough which followed the global financial crisis. As we enter the 11th year of the bull market, it’s valid to ask whether it has further to run. Often, excessive central bank tightening has ended the cycle, but the Fed has moved to a more dovish stance, the ECB has announced fresh stimulus measures, China’s NPC pointed to more accommodative monetary policy ahead, and the BoJ is still engaged in quantitative easing. Against that backdrop, we’re still overweight global equities.
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