20th June 2016
Global bond markets are pricing in a catastrophe. Never before have global rates been this low. Not in the 1930s, not in 2008, not even during the European Banking crisis in 2011. But are things really as bad as this suggests? Whilst undeniably structural impediments to global growth exist, most of these have been evident since before the Global Financial Crisis (demographics, global indebtedness, unfunded liabilities etc). Monetary policy is what has changed, with global central banks starting down a path towards negative rates in 2008 from which they have barely deviated. Japan’s economic experiment has failed with the situation continuing to deteriorate as it had been prior to Abenomics. A new direction is required to kick start growth in the ailing economy. In Europe, the situation has turned political with ‘Brexit’ now a real concern and a wave of anti-establishment sentiment building across the continent (a recent poll showed 58% of Italians want a referendum on the EU). The staggering performance of headline jobs numbers in the US (driven in the most part by job creation for over 55s) is in danger of petering out and with it the economy’s momentum.
Uninspiring, yes. But does all of this signal an imminent collapse? It certainly doesn’t feel like it in our view. For one thing financial markets are too awash with cheap money. ECB purchases of non-investment grade bonds being a case in point! We are looking at years of sub optimal growth for sure but perhaps not a 2008 style collapse. Realistically, the world will continue to chug along at 2.5%/3% GDP growth. However it seems we are still some way from the real reforms (political and economic) required as policy makers don’t seem interested in doing anything other than doubling down on previous initiatives – more QE, even more negative rates. Perhaps it may take a political shake up from a despondent majority to focus minds on addressing the real issues.
From a markets perspective, government bond yields are currently at extreme levels and potentially susceptible to a sharp sell-off. A ‘Remain’ vote in the UK or even a +150k non-farm payrolls number in the US could be the catalyst. Any over exuberance however will likely be short-lived in our view as without a deviation in current policy the world will resume its march towards further negative rates.
By Steve O’Hanlon
*The views above are published solely for information purposed and are not to be construed as a solicitation or an offer to buy or sell any securities, or related financial instruments. It does not constitute a personal recommendation as defined by the Financial Conduct Authority (“FCA”) or take into account the particular investment objectives, financial situations or needs of individual investors. The views above are based on public information and sources considered reliable.