It has been four long years since two major events last occurred, a 10% “correction” in US equity markets and the Rugby World Cup. These events both happened during the third quarter although they were greeted by very different emotions.
The excitement and expectation as England looked to take the Webb Ellis cup away from the mighty New Zealand All Blacks…versus the worries and concerns that the global economy was looking less than rosey as a slowing China would have a knock on impact to the rest of the world.
But how quickly emotions can shift, England’s defeat by Wales on Saturday 26th September brought despair to a nation, yet that following Monday equity markets hit their lows, and have since marched upwards, while both investment grade and high yield corporate spreads have tightened. It is easy to see why an English rugby fan is disillusioned and distraught, but what has driven the change in sentiment and encouraged risk markets to perform this month?
As has been the case so often since the financial crisis, you only need to look towards central banks to find your answers. “Bad news” is really “good news” has yet again come to the forefront. Low inflation or even deflation in large parts of the world, weakening global data, on top of concerns around China and other emerging economies have led to the Federal Reserve pushing back expectations to begin tightening monetary policy. Meanwhile the People’s Bank of China has been cutting interest rates and European Central Bank President Mario Draghi has delivered his very own version of “strong vigilance” by all but telling markets that the ECB will provide additional easing at their upcoming meeting in December. Of the world’s major central banks this just leaves the Bank of Japan, and given they are struggling to achieve their price goal, it is looking very likely they will be joining the party sooner rather than later.
This all points towards a supportive environment for global fixed income investing, as easing by the ECB and Bank of Japan will push their respective bond yields lower and make US Treasuries look higher yielding in comparison. Credit markets have seen significant underperformance over the last 12 months, but with central banks still in play and prepared to do whatever it takes to ensure the global economy doesn’t stall, the additional yield pickup is compelling, as outside of the energy components default rates are expected to remain low.
As we move towards the end of the year, this continual “low” growth will allow the central bank “chariot” to keep comin’ for to carry the markets home. And as for English rugby fans…there is always Japan in another four years…