Investment Desk Bulletin

13 September 2016

Back to school for market volatility

IDB 13 09 16

By Pau Morilla-Giner

In this week’s IDB, we take a look at macroeconomic conditions and outline a check-list for anticipating a turn in the US economic cycle. We consider the implications of current monetary policy and future policy options.

- The tepid global growth and low inflation environment persists. Industrial activity has stabilised after a period of weakness, but there are signs of slowing momentum in global consumer strength.

- The US economic cycle is unusually extended, but it seems likely that we are at the mature end of the current expansion. With this in mind we have identified 5 key indicators to signpost the next downturn. In all measures (jobs growth, labour’s share of GDP, wages, yield curve and consumer confidence) we find that there is little to suggest an imminent end to the current US expansion.

- It is easy to become accustom to unconventional Central Bank policy, but on reflection we are clearly in extraordinary times. Low and in several cases, negative interest rates have distorted markets, resulting in negative yields on 30% of all government bonds.

- If the benefits of deeper monetary policy support are lower and come with additional risks, it is likely we will see more fiscal stimulus from governments. However, high levels of public debt in many countries may limit the scope for more debt financed spending, leaving open the possibility that future government spending may need to be financed by Central Banks, so called helicopter money.

- We have retained our defensive asset allocation position to secure some of the portfolio gains made over recent months and in anticipation of greater market volatility.  

Please click here to view the presentation.