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Bonds And Equities Send Different Signals On Growth

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Whilst global equity markets are flat on the week, they are up year-to-date 12-13%. However, the big news over the last ten days was that bond markets suddenly became tired of waiting for the anticipated upturn in global industrial production, which equity markets are pricing in. This, coupled with the Fed turning even more dovish last week, led to a sharp rally in government bonds around the world. Government bonds hedged to sterling are up 2% month-to-date, an exceptional return for bonds.

On the other hand, global growth data has not been bad this week and the Goldman Sachs global current activity indicator does appear to be stabilizing. The yield curve (10 year – 2 year curve) actually widened a little during the week from 11 basis points last week to 15 basis points this morning. This indicates a better story on growth albeit at the margin. Many analysts continue to believe that global industrial production is due for an upturn.

However, it would help if the world could get positive developments on trade and Brexit given that economic data coming out of China is still a mixed bag, despite the fact that the effects of its expansionary policies are likely to bear fruit. A positive tweet from Treasury Secretary Steve Mnuchin this morning lifted the mood on trade and Chinese equities rallied strongly, up some 3%. Commentators believe Trump will want anything out of the way which could hurt the economy as he gears up for an election in 18 months. So a deal is still expected but it could take a little longer than initially hoped and the risk to markets is that a deal does not happen.

The other barrier to a pickup in global industrial production is Brexit. On Wednesday evening eight Brexit options were put to the vote in the House of Commons yet no single option attracted a majority. This showed how deeply divided parliament is on Brexit. This afternoon, Theresa May was unable to get her Brexit deal passed at the third time of asking so the Brexit date has moved forward to 12thApril. The options on the table are:

(i) Leave with “no deal”;

(iii) Seek a long delay, involving participation in elections to the European Parliament; or

(iv) Unilaterally revoke Article 50.

The probabilities of what will happen have not changed week on week, with “no deal” the least likely outcome. However, the probability of a general election has increased and should be monitored in the weeks ahead.