Market sentiment faded a bit over the week as risky assets lost some ground and bond yields continued to drift lower. Equities, fixed income spread products and commodities all lost some ground. With exception of the latter, however, all asset classes have still a positive year-to-date performance.
Even taking into account some of the corrections in commodities and real estate that took place in March, it still seems remarkable how calm markets have been against the background of political and policy noise in multiple parts of the World.
Different from earlier in the year, however, signs of increased (geo)-political uncertainty (French elections, risk of conflict with North Korea) are coinciding with tentative signs of softening on the data front. Although it is much too early to adapt our thinking on the underlying strength of the global business cycle, it has to be acknowledged that markets trade on the direction of change in the information that they perceive to be relevant for the pricing of financial assets. In that respect it should not be surprising to see that a period in which economic data surprise less to the upside (compared the economists’ expectations) than before feeds into markets becoming a bit more fragile in the short-term. Similarly, visibility in the near-term outcome of the French elections (who will pass into the second round of the Presidential election is more uncertain than ever) and the way that the intensifying tension between North Korean and both the US and China will be resolved has gotten less clear by the day recently.
The mix of more economic and political uncertainty is a classical cocktail that markets do not like. Therefore the majority of recent market behaviour is probably best explained on the back of these two components. Moreover, it seems likely that they could persist for a bit longer.
Still, it is important to appreciate that both a political crisis or an economic slowdown have not yet materialised and are not part of our base case scenario for the rest of the year. Obviously we can never exclude these scenarios completely, but we would be much more defensive if these outcomes where really central in our thinking. There is actually more than enough evidence that the synchronized global recovery is persisting underneath, even if the degree of upside surprises in data is fading a bit. Not only broad-based survey data from both the manufacturing and service sector continue to point in that direction, but also “hard” data on global trade (see graph below) and industrial output growth keep on showing a clear recovery trend.