Market indicators suggest support for the sharemarket rebound of 2019 is firming.
The main anchors for this view are signs that the large downgrade to earnings through 2018 is starting to stabilise – with green shoots appearing across an array of Chinese, and to a lesser extent European, indicators.
However, this more upbeat view is not shared by global sovereign markets where yields have rallied strongly and yield curves have flattened or in some cases inverted.
While ANZ’s chief investment office does not expect a spike in yields it does expect moderate upward pressure on yields in the near term as the global slowdown stabilises and likely improves.
Are we in a U-shaped recovery?
It is our opinion that this means we could be nearing the bottom of a global U-shaped recovery – where economies gradually recover and capacity constraints emerge slowly.
This is quite different from a V-shaped recovery where economies rapidly recover often resulting in central banks needing to quickly tighten policy (raise rates) as capacity constraints emerge in economies.
Supporting factors for a U-shaped recovery include:
- neutral or modestly high (rather than very low) levels of stockpiled goods
- US fiscal stimulus now fading while the US dollar is steady
- the Chinese government continuing to moderately stimulate its economy
- signs US companies have already slowed their capital expenditure
- Japan and the euro zone’s level of potential growth being much lower than past decades
- likely slower longer term growth in the US and Chinese economies.
A U-shaped path makes it more likely the current growth phase of the investment cycle would extend. Such a gradual rise in economic growth would mean central banks, most importantly the US Federal Reserve, would be less likely to tighten policy (raise rates) and could even stay on hold for quite a while.
Currently, we expect the Fed to hold rates until 2020 with inflation relatively subdued.