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In this fortnight’s newsletter we explore market reaction to GDP release events, US fixed income trends, the potential impact of?trade uncertainty on equities within G20 countries, and the divergence of equity performance across APAC financial markets.
Dive into the topics that interest you most.
Market reaction to GDP release events
US gross domestic product (GDP) growth is an important macroeconomic indicator for investors because economic growth trends in the world’s largest economy set the tone for corporate profits and risk appetites. GDP releases, both actual and preliminary, influence monetary policies and economic decisions in the US and around the globe. Although GDP is a lagging indicator, it is widely followed. Analysts issue estimates and investors closely watch the estimates and releases. In this research, we assessed if GDP estimates and final releases, contain information and affect investors’ decisions by analysing how the US market and factors such as value, low volatility, quality, momentum, and size reacted to GDP releases.
Dividing events into categories allowed us to examine investor reaction to the magnitude of GDP growth and surprises relative to growth estimates. We found that over the last 24 years, the Russell 1000? Index performed better than average on all GDP release dates, including advance, second and final.
The impact of GDP release events on the daily excess returns of low volatility, quality and momentum factors was not significant. Size performed better than average on release event days, while value underperformed.
There are several possible explanations. Markets may already have a good idea of what to expect from the GDP growth release figures. Advance GDP growth, despite the name, is typically released 30 days after the end of the quarter. Investors may be using leading indicators to get early indications on the GDP growth estimate. We used GDPNow, the nowcasting index, as a proxy for the leading indicators. Moreover, investors could have reacted positively even to seemingly negative releases if they help reduce investors uncertainty by clarifying economic conditions. Remarkably, the excess performance of investing only on the release date before, and after 2008, shows that the effect has only existed since quantitative easing was introduced.
For this analysis, we used the Russell 1000 as a proxy for the US stock market. The Russell 1000 tracks the performance of the large-cap segment of the US equity universe. ?We also used pure factor indices from the FTSE Target Exposure Index Series to track the behaviour of factors on or around the release dates. Our standard factor definition and index construction are given in the ground rules.
Our research provides?valuable insights into the markets’ behaviour on and around GDP release dates, in context of the overall market and factor returns.
FTSE Russell fixed income perspectives
A comprehensive guide to US fixed income market trends and analysis
Attractive yield levels, positive credit fundamentals, semi-stable monetary policy, and forecasted earnings growth are just a few of the forces pushing investors to revisit asset allocations. While there is still uncertainty around geopolitics and the impacts of trade, immigration, and tax policies, market participants are cautiously optimistic in the prospects of continued economic growth and the overall trajectory of inflation and unemployment.
Just three years ago, the market lost faith in the 60/40 portfolio with equity and fixed income returns both realising record drawdowns as the Federal Reserve increased interest rates at a historic pace. The worst calendar year performance on record left fixed income investors shell-shocked. Many found comfort in the coffers of money market funds and other income-oriented strategies.
Now in this new part of the cycle, market participants are eyeing fixed income as an attractive source of both reliable income and portfolio diversification. The lens through which investors dissect this asset class is much more well defined than ever before.
The modernisation of fixed income data combined with standard indexation practices has broadened the knowledge base around income opportunities and the differentiated risk/returns underlying each specific sector.
The exchange-traded fund (ETF) has turned that knowledge into something more easily investable. This ability to enter more precise corners of the fixed income world through the ETF has allowed asset managers, asset owners, and everyday investors to expand their toolkit in defence against various rate regimes and economic cycles. What was once thought of as solely a trading tool, has transformed into a vessel used to both strategically navigate fixed income sectors and create tactical portfolio building blocks. These two use-cases have provided a secondary tailwind for the asset class — where the ETF goes, innovation (and inflows) tend to follow.
Fixed income should no longer simply be benchmarked or evaluated within the context of just the “Agg.” This asset class has become more nuanced. Investors should be leveraging the data at hand to hold their managers and asset allocation policies to a higher standard. In this paper, we touch on the 2024 major macroeconomic headlines, discuss the current state of the fixed income fund market, breakdown key bond sectors by risk/return, then conclude with thoughts on the year to come.
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Differing macro outlooks drive diverging performance
APAC Financial Markets Spotlight: February 2025 Report
Over the last three months, the direction of monetary policy continued to diverge in APAC as growth outlooks differed and US-China trade tensions raised uncertainty. More hawkish central banks included Japan’s BoJ, which hiked rates further, and Australia’s RBA, which kept rates on hold. By contrast, Korea, Indonesia and Philippines eased. This has led to a divergence of equity performance.
Uncertainty around US trade policy not only affects China’s economy but also increases risks to growth in economies with higher export exposures such as Singapore, Malaysia, Thailand, Taiwan and Korea. APAC government bond spreads to US Treasuries (UST) narrowed, especially in China, where yields fell given intensifying downside risks to the region’s economic outlook.
Japan's economy showed resilience with firmer wage growth and consumption. The BoJ raised its policy rate, leading to higher JGB yields and Financials stocks outperforming. In Australia and New Zealand, diverging monetary policies saw the RBA holding rates steady while the RBNZ cut rates amid negative q/q GDP growth. Australian Banks rallied.
China's government focused on boosting domestic demand and combating deflationary pressures, but geopolitical uncertainties and structural challenges weighed on the growth outlook. The rally in Chinese and Hong Kong equities seen in 3Q24 faded as a result.
India saw a policy rate cut and fiscal supports to boost consumption. The performance of Korea and Taiwan equities diverged further. ASEAN countries such as Indonesia and Philippines cut rates further, weighing on their Financials stocks and overall equity performance. The Monetary Authority of Singapore eased, but Singapore’s rates are more correlated with US rates, helping Singaporean Financials to outperform.
Potential financial market implications from trade uncertainty
Macro Microscope
In this episode of Macro Microscope Indrani De, Head of Global Investment Research at FTSE Russell, highlights three key transmission channels through which trade uncertainty could impact developed and emerging equities' within G20 countries:?(1) Index revenue exposure to the U.S. market (2) Export intensity of the economy (3) Implications for market volatility from beta exposure to the U.S. ?Which countries are most exposed, or least vulnerable? ?
John Dioufas, Director, Datastream and Macroeconomics, Data & Analytics, LSEG delves into how macro uncertainty is impacting central bank actions, economic surprises and signs in market pricing. How are the markets preparing for increased volatility?
HashKey FTSE Digital Asset Top 20 Index Fund
The first multi-token crypto index fund approved by the Securities and Futures Commission (SFC) of Hong Kong
FTSE Russell congratulates HashKey Capital on the successful launch of the HashKey FTSE Digital Asset Top 20 Index Fund.
With the launch of Hong Kong’s New Capital Investment Entrant Scheme (CIES) last March, the fund is designed to offer investors a HashKeydual advantage - providing a compliant and diversified digital asset investment product while also serving as a pathway to residency.
Developed in collaboration with HashKey Capital, the FTSE Custom Digital Asset Top 20 Index tracks the largest 20 digital assets by market capitalisation in the eligible universe.
FTSE Russell
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