Adam Kibble

Global economic growth is expected to reaccelerate in 2026 as the delayed effects of interest rate cuts combine with ongoing government spending, creating a supportive but increasingly complex environment for investors, according to Adam Kibble, multi-asset portfolio manager at Schroders.

Kibble said that both monetary and fiscal policy settings remain accommodating across major developed markets, helping to drive stronger growth but also increasing the risk of inflation becoming more persistent than expected.

“Global growth is showing clear signs of reacceleration as the impact of rate cuts since mid-2024 flows through to economic activity. However, with governments continuing to prioritise cost-of-living support and stimulus spending, we are entering a ‘run-it-hot’ policy environment that could see inflation stall or even rebound during 2026,” he said.

Kibble flagged that central banks globally appear to be nearing the end of their easing cycles, with markets beginning to reassess expectations for further rate cuts.

“In many regions, policy remains highly supportive for growth, but central banks are becoming increasingly cautious as inflation progress slows,” he said. “This is creating a higher-for-longer interest rate backdrop that investors need to be prepared for.”

In Australia, economic growth has rebounded more strongly than expected, supported by a resilient labour market and solid consumer spending.

Kibble believes that ongoing capacity constraints across parts of the economy were slowing the disinflation process, raising the likelihood of further policy tightening by the Reserve Bank of Australia (RBA), following this week’s interest rate increase.

“Recent data highlights strong domestic demand and improving business confidence, but inflation remains sticky,” he said.

“The RBA’s latest rate increase reflects the persistence of pricing pressures, and markets are increasingly recognising that further tightening may be required if inflation does not moderate as expected.”

The US economy also exceeded expectations through the second half of 2025, driven by strong consumer demand and capital expenditure.

Kibble said fiscal stimulus and earlier rate cuts have supported growth momentum in the US, but the outlook for further monetary easing remains uncertain.

“While markets continue to expect further rate cuts by the Federal Reserve later in 2026, this will largely depend on whether inflation shows a meaningful and sustained decline. Without clear progress on inflation, the scope for additional easing may be limited.”

Kibble said with inflation risks rising and central banks nearing the end of their easing cycles, managing interest rate risk remains critical.

“We continue to position portfolios for a potentially prolonged higher interest rate environment, maintaining low duration exposure while selectively allocating across global bond markets,” he said.

“We are favouring longer-term bonds in Australia to mitigate the impact of potential RBA tightening, while maintaining exposure to shorter-dated US bonds to capture potential easing opportunities and reduce volatility.”

Despite supportive growth conditions, Kibble said credit markets currently offer limited value due to historically tight spreads.

“Credit fundamentals remain strong, but valuations are stretched and compensation for risk is low. In this environment, we are maintaining a focus on high-quality, liquid credit exposures, particularly in Australia and Europe, where yield curves remain relatively attractive,” he said.

Kibble added that recent strength in the Australian dollar had provided opportunities to actively manage currency exposures.

“The Australian dollar strengthened significantly earlier in the year as interest rate differentials widened and expectations of RBA tightening increased,” he said.

“However, with sentiment indicators suggesting the currency had become overbought, we have begun reducing exposure at elevated levels.”

While the macroeconomic outlook remains broadly supportive for growth, Kibble believes that there is a risk that the progress on lower inflation has stalled and may reverse.

“With spreads tight and policy uncertainty rising, maintaining liquidity and flexibility remains key to navigating potential market volatility and capturing opportunities as valuations evolve.”

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Adam Kibble

We continue to be more optimistic than consensus about the global economy and expect growth across both developed and developing economies to be higher in 2026 than this year.

We also expect marginally higher inflation as wages growth reflects tighter labour markets. If we are correct, it is likely that central banks are close to the end of their easing cycle and interest rates are at their cycle lows. With the US government shutdown, hard data on the US economy is scarce, but consumers are still spending, and the AI capex boom continues, putting a floor for economic growth of around 2%.

US inflation data for September was marginally lower than expectations, mostly due to the housing components and rent, which remains the main weak spot in the economy. The US Federal Reserve cut rates as expected to 3.85%, but at the post-meeting press conference, Fed Chair Powell guided the market away from expecting another cut in December.

At the time of writing, market pricing for a December cut has shifted from 100% certainty down to a 65% probability. Further cuts are also priced for next year with a terminal rate of 3% by the end of 2026. We continue to view this as too aggressive, particularly given our strong growth and higher inflation outlook.

In Australia, the September quarter CPI was much worse than feared, following the August monthly CPI’s upside surprise. A broad-based increase in inflation pushed the year-over-year CPI back to 3% and will keep the RBA firmly on hold. The market is tentatively pricing in another rate cut for the first half of 2026, mostly in expectation of further weakness in the labour market.

If our view is correct and economic growth is on an upswing, then the risk is further tightness in the labour market and more pressure on wages.

The European Central Bank (ECB) kept rates on hold in September as expected and markets are priced for them to be on hold for an extended period. The ECB seems more confident on European growth prospects as looser European fiscal policy and financial conditions support the economy.

Last month, we started positioning for a turn in the monetary policy cycle, mostly by reducing interest rate risk and credit risk at the margin. We reduced duration to below 0.50 years and have maintained that position as we expected inflation to be above the RBA’s forecast and result in a repricing higher in short term yields. While correct, this meant the portfolio didn’t benefit from the post-employment data rally. However, we did benefit from the Australian yield curve flattening significantly following the CPI data.

Within credit, spreads remain historically tight, and we have continued to reduce risk, mostly by moving up in quality in the banking sector. We reduced exposure to subordinated bank debt by 7%, reduced senior bank debt by 5% and added 5% in semi-government securities. Subordinated bank debt spreads are extremely tight and moved wider over the month. We continue to hold credit default protection where spreads remain very tight – specifically across US and European high yield and US investment grade sectors – adding 3% protection over the month.

It was a busy month in Australian residential mortgage-backed securities. Several new issues came to market in our favoured mutual sector (mostly non-profit credit unions) where spreads are wider than major bank issues and credit standards are high. We sold 8% exposure from older bank issues where spreads had moved below 60bps and replaced them with the new mutual issues at spreads closer to 90bps, lifting total RMBS to 27% of the portfolio.

Foreign currency exposures had a negative impact on monthly returns. We have benefited from being short US dollars (USD) since March, and although we reduced the size of the short position, we gave back some gains due to a rebound in the USD in October as markets priced out the size of policy easings.

We continue to keep the Australian dollar (AUD) short position to a minimum as we expect the AUD to benefit from the RBA being on hold and have preferred using the USD to fund emerging market currency exposures.

The USD gained the most against the Japanese yen (JPY) where we continue to maintain a long position. We view the JPY as the best risk-off hedge in currency, providing downside protection from potential credit market dislocations. We expect the Bank of Japan (BOJ) to restart their policy tightening cycle in the face of persistently higher inflation and wages growth, and this should support the yen over the medium term.

With a more optimistic growth outlook for 2026, we view current yields at their cycle lows. As such, we expect to maintain interest rate risk towards the lower end of our range. Credit markets are fully discounting good times ahead and the extra premium investors receive for lending to corporates over governments is historically narrow, reducing the margin of safety.

As a result, we have shifted up in quality in the bank sector and added some semi-government exposures. Some cracks are appearing in the lower quality US syndicated loans and ABS sector, with recent defaults linked to fraud, but it remains contained for now. If spreads widen, the portfolio is highly liquid and well positioned to add credit risk as value is restored.

By Adam Kibble, fund manager, Multi-Asset Australia

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Sebastian Mullins

As global markets reach the midpoint of 2025, a complex and uncertain macroeconomic landscape is fuelling volatility fatigue, according to Schroders, in a new outlook released last week.

The outlook suggests that investors are increasingly ignoring the ongoing geopolitical risk, economic volatility, and policy uncertainty, and instead are choosing to look to fundamentals in an environment where stretched valuations, policy divergence, and asset price inflation dominate the narrative.

Global macro: markets muddle through murky fundamentals

Despite headlines dominated by trade tensions, inflation divergence, and geopolitical uncertainty, global markets have shown remarkable resilience. The current rally has occurred largely without excess sentiment or broad participation, pointing instead to a defensive reweighting toward neutral positioning, says Sebastian Mullins, head of multi-asset & fixed income at Schroders.

While ceasefires and tentative trade agreements have eased some short-term concerns, structural issues remain. Sluggish global growth, fiscal stimulus without productivity reform, and an embattled US Federal Reserve all contribute to a highly uncertain outlook. Inflation remains contained for now, but the potential for fiscal-driven yield curve steepening is growing, particularly in the US.

“Markets are no longer reacting sharply to geopolitical developments, they’re fatigued,” said Mr Mullins. “This leaves us uncomfortably neutral across all asset classes, as valuations remained stretched and expected returns remain muted. But the cycle remains intact, albeit uncomfortably slowing.”

Australian macro: short-term strength, long-term questions

In Australia, the macro backdrop remains stable and supportive in the short term. Inflation is moderating towards the Reserve Bank of Australia’s (RBA) target, and growth remains resilient (though private sector activity is weak), despite the RBA holding interest rates this month.

The upcoming August reporting season is anticipated to provide further insights into corporate performance and expectations for the year ahead. However, questions remain about the sustainability of these dynamics.

“Australia, like much of the developed world, is grappling with stagnating productivity growth and GDP per capita,” said Martin Conlon, head of Australian equities.

“Fiscal imbalances are obvious, with governments showing little intention of aligning spending with tax revenues. While equity markets benefit from their relative size and liquidity, bond markets become volatile. We’ve seen the gap between earnings yields and bond yields reach concerning levels – this reflects a market environment where asset prices are increasingly detached from economic reality.

“Asset prices continue to outpace wage growth, leading to increased wealth for asset owners and a widening divide with the rest of the population. The Australian economy is heavily leveraged, with property prices now four times the country’s GDP, raising concerns about affordability, resource misallocation, and long-term growth prospects. Lower interest rates are unlikely to stimulate productive investment, given capacity constraints in sectors like housing and infrastructure, and instead risk fuelling further asset price inflation,” added Mr Conlon.

Fixed income: a positive outlook for 2025

Yield curves are steepening globally, particularly in the US, as inflation approaches central bank targets and fiscal concerns grow. A potential change in leadership at the Federal Reserve could accelerate this trend, embedding a higher term premium in long-dated bonds.

“The Australian fixed income market has benefited from a stable macro environment, with strong demand for new issuance and average deal subscription levels around 3.8 times covered. Execution risk for new issuance remains very low, and the market is still catching up to Euro and US credit spreads. The July interest rate hold, subdued growth, and softening inflation underpin a positive outlook for fixed income performance through year end,” said Kellie Wood, head of fixed income.

Multi-asset: neutral positioning amid uncertainty

The stance in multi-asset is broadly neutral across all asset classes, reflecting stretched valuations and muted expected returns. While the economic cycle is slowing, it remains intact, and the persistent volatility and policy uncertainty make it difficult to take strong directional views. Globally, equity markets have rebounded sharply from earlier lows, with the S&P 500 rising over 25% from April to June despite ongoing geopolitical risks and muted investor sentiment.

“Most investors have only moved to neutral positioning, and excessive gains across asset classes are considered unlikely given the prevailing macro and policy uncertainty. Short-term volatility is expected to persist, and asset allocation decisions are likely to remain cautious, with investors wary of headline-driven moves and stretched valuations,” said Adam Kibble, portfolio manager.

Credit: strong demand for local securities

In Australia, the credit environment is characterised by healthy demand, solid corporate fundamentals, and a favourable technical backdrop. Corporate balance sheets are solid, with robust margins, especially among infrastructure and utility companies, which are favoured for transparent cash flows and low earnings volatility.

Activity in the subordinated corporate space is increasing, with recent hybrid and Tier 2 issuances. Since March, Tier 2 paper has underperformed senior debt, with some spread widening due to supply in late May and early June, but this was largely retraced as supply diminished and geopolitical tensions rose.

While the US credit market is becoming increasingly expensive and susceptible to volatility, Helen Mason, portfolio manager, believes that strong demand for Australian securities is expected to help mitigate some of this risk, especially with a projected decrease in Tier 2 supply in the second half of the year.

“The credit market has recovered, but the outlook is one of caution due to the potential for further market swings and an uncertain policy backdrop. Investors are advised to remain vigilant, as the environment is likely to remain volatile and sensitive to shifts in fiscal and monetary policy,” said Ms Mason.

Australian equities: fundamentals under pressure

Investors face a challenging environment where valuation discipline and a focus on fundamentals are increasingly difficult to maintain amid regulatory and market pressures, according to Mr Conlon.

“The Your Future Your Super regime and the rise of passive investing have redefined ‘risk’ as simply not holding enough of the largest index constituents, such as CBA. This has meant CBA being bought at ever-higher valuations, regardless of its fundamental value, exposing investors to almost certain loss.

“This distortion is not limited to CBA. The market’s obsession with businesses that employ minimal capital and promise rapid economic value creation, with little regard for business duration, is detached from economic reality and history. Companies have become skilled at offsetting current bad news with future optimism.

“The market’s fixation on revenue growth and momentum leaves opportunities in more mundane sectors, such as energy and materials, largely ignored, except for gold. We see abundant opportunity in these less fashionable corners of the market,” said Mr Conlon.

“We remain committed to a disciplined, risk-adjusted approach to value creation, even as market forces and policy settings make this increasingly uncomfortable. We will continue to seek out opportunities where the crowd is not looking, and to resist the pressure to follow the herd into overvalued territory,” added Mr Conlon.

The post Volatility fatigue: Schroders 2025 mid-year investment outlook appeared first on AdviserVoice.

Mr Kibble will work with the multi-asset team in a co-portfolio manager capacity as well as join the FX and Rates strategy research groups.

Mr Kibble has been at Schroders since 2020 as an investment director for multi-asset and fixed income. He has over 21 years’ experience as a portfolio manager, firstly with Queensland Investment Corporation (QIC) and subsequently 18 years with Macquarie Investment Management, in both Sydney and London. His portfolio management experience includes lead portfolio manager roles in global fixed income, currencies and commodity strategies. Before joining Schroders, Mr Kibble worked at Insight Investment as an investment specialist.

Mr Doyle said Mr Kibble’s skills and experience, alongside his knowledge of the team’s investment process and multi-asset strategies, made him a standout candidate for the role.

“Since joining Schroders, Adam has done an exceptional job in his capacity as investment director for the fixed income and multi-asset teams,” Mr Doyle said.

“As part of this role, Adam has been a member of the Multi Asset Portfolio Construction Group and an active contributor to the investment debate and portfolio management process where his investment skills and experience have been evident and valued.

“This internal appointment also reflects our commitment to talent development and the bench strength of our overall team.”

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As the week progressed fears of the coronavirus seemed to somewhat abate which, with the help of constructive data releases, allowed global equities to move to new all-time highs. Government bond yields moved higher, reversing part of the strong rally the market has seen since the turn of the year. In foreign exchange, emerging market currencies generally outperformed developed markets as investors tilted to a risk-on focus.

In other news, the US impeachment story finished with the senate voting to acquit President Trump as was widely expected since the beginning of the saga. We also received news from China that they intend to halve tariff rates on €75bn of US imports, as part of the recently agreed ‘phase one’ deal, from 14 February.

Financial markets mostly immune to the continued spread of coronavirus

Despite both the case and death count continuing to rise, market pricing implies investors are becoming less concerned about the potential economic impact of the coronavirus. In part, this may be due to the rate of increase of confirmed cases slowing down, in contrast to the exponential rate experienced towards the end of January. In addition to that, the virus seems to be relatively contained outside of the China. That said, there are notable risks to consider. Not only is the virus still spreading with confirmed cases and deaths increasing as each day passes, the economic impact of the epidemic both in China and more globally still remains uncertain.

What we did see is a strong policy response from China, including further cuts to both the 7 and 14-day repo rates and an injection of 150 billion yuan into money markets in an attempt to smooth the impact experienced as the financial markets reopened. Whilst we expect the impact on growth data will be negative over the coming weeks, it remains unclear how this will impact market sentiment.

Economic data helps to reinforce our view of a global economy in stabilisation phase

Based on economic data releases last week, it appears the state of the global economy entered a period of stabilisation leading into the coronavirus episode. As mentioned above, it remains to be seen whether this holds up as the impact of the virus tremors through growth data.

Focussing on that pre-coronavirus data, this week China’s January Caixin manufacturing PMI printed at 51.1 (vs. 51.0 expected). In the US, the manufacturing ISM significantly beat expectations rising to a 6-month high of 50.9 (vs. 48.5 expected), with new orders rising to 52.0 (vs. 47.7 expected) – its highest level since May 2019. The non-manufacturing ISM rose to 55.5 (vs. 55.1 expected) and its highest level since August.

We reported many of the Europe-based provisional PMI numbers in our last weekly note, which as a reminder generally overshot expectations. There were further upward revisions to those prints this week, including the UK composite PMI printing at 53.3 which marked the strongest reading since September 2018. The Eurozone composite PMI was also revised to 51.3, with Germany’s composite PMI printing at 51.2.

Lastly on the data front, Friday brought the release of the closely watched monthly US jobs numbers which followed a very strong ADP print earlier in the week. 225,000 jobs were added, which overshot the market expectation of 165,000, and is an increase from the December print of 145,000. The unemployment rate ticked up slightly to 3.6%.

Global earnings growth broadly flat for 2019

It was the last busy week of US earnings season with a further 97 companies reporting (representing 16% of S&P 500 market cap.) While clearly there have been bigger macro events driving equity markets over results season, we did find it notable that share price reaction for US companies reporting was skewed negative. This contrasts with Europe, where share price reaction has been more positive than average, perhaps indicating much lighter positioning in Europe vs. US. In both regions, and indeed globally, EPS growth for 2019 was broadly flat. Expectations for 2020 remain for around 10% growth in global EPS, a number which we feel is too high given the backdrop of declining margins and weak growth.

Outlook

US politics will remain a key focus for markets this coming week. After the less than smoothly run Iowa caucus last week, eyes turn to the New Hampshire primary where various polls and models seemingly give Bernie Sanders the highest chance of winning.

On the data front, attention turns to growth with preliminary GDP prints from both Germany and the UK. On the former, market expectation is for a 0.1% increase; however it comes after a relatively poor industrial production print, so one to watch closely.  We also receive US inflation data. 

Wrapping up on central bank activity, we will hear policy decisions from New Zealand and Sweden on Wednesday, followed by Mexico the following day.

By Adam Kibble

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•  Markets focus on the potential economic impact of the coronavirus as the confirmed cases and death toll rise.
• With data still suggesting tentative signs of stabilisation, the Federal Reserve meeting offers little to chew on.
• A busy week for US earnings but share price reaction remains muted.
• Outlook: US primary elections begin, several central bank decisions and the US earnings season continues.

Market and economic review

US earnings, central bank policy meetings and various data releases took a backseat last week, as the fear of broader contagion of the coronavirus steered market performance. Most global equity bourses suffered with emerging market equities being the most notably hit. Government bond yields moved lower and credit spreads widened. The South African rand, Korean won, Brazilian real and Russian rouble were the worst performing currencies against the US dollar, whilst the pound had a strong week in part to the Monetary Policy Committee (MPC) electing not to cut interest rates on Thursday against market expectations.

Markets focus on the potential economic impact of the coronavirus as the confirmed cases and death toll rise

As the world still tries to quantify the severity of the coronavirus and the corresponding impact on economic growth, markets have taken the opportunity to step back until further clarity is available. Staying with facts, there are currently 361 confirmed deaths and 17,205 confirmed cases. This takes the number of cases past the official recordings of SARS, which analysts have been using as a benchmark to estimate market and economic impact. For context, only 98 of those confirmed cases were outside of China (spread across 18 different countries), with only one recorded death.

The World Health Organisation has now declared the outbreak as a PHEIC (Public Health Emergency of International Concern), however this is positive news as it provides support (from global health authorities) to aid those countries with less dependable health systems. Russia has announced that the closure of its land border with China will continue through to 1 March, beyond the end of the Chinese New Year celebrations and the US State Department has advised US citizens against travelling to China.

With the spread of the virus continuing and the reactions of authorities ramping up, the coronavirus is likely to be the focal point for markets in coming weeks, until there are signs that the virus can be contained and the economic impact more accurately assessed.

A busy week for US earnings but share price reaction remains muted

It was a busy week for US earnings with 144 companies reporting (~40% S&P 500 market capitalisation). The EPS growth rate currently stands at -0.7% which is just ahead of pre-season expectations for -1.6%.

A key feature of this earnings season has been the muted share price reaction to both beats and misses on consensus expectations. Our interpretation of this is that it likely means that while equities are well owned; positioning is not yet at ‘extreme’ levels. It is also a reflection of the low levels of management guidance we’ve seen this quarter which is normally a bigger driver of share price moves than reported results. That being said, there were a number of companies whose earnings reports provided an insight into broader macro themes this week worth highlighting.

Amazon delivered a big beat on expectations, buoyed by strong sales over the holiday period. This showed further confirmation of the strength of the US consumer, something that we discussed a few weeks back when the banks reported. On a less positive front, Caterpillar, often viewed as a global manufacturing bellwether, reduced its guidance forecast for 2020. The firm highlighted continued uncertainty as the core reason with the CFO stating that “A lot of people have been deferring making capital decisions”.

With data still suggesting tentative signs of stabilisation, the Fed offers little to chew on

There was not much to draw from the Federal Open Market Committee (FOMC) meeting on Wednesday, where rates were left unchanged. There were a few dovish adjustments in the FOMC statement; the first of which was in the description of household spending which is now only rising at a “moderate” pace vs a “strong” pace as in the December statement. The second comment was a change in inflation in regards to their current policy stance, saying it was appropriate in supporting inflation “returning to” the Committee’s symmetric 2% objective, rather than “near”. Slim pickings indeed.

The UK MPC decided not to ease interest rates on Thursday, where the market expected a 0.25% reduction to 0.50%. The unexpected move resulted in the British pound more than recovering from its downward trend leading into the meeting as the market expected probability of an interest rate cut was rising.

In a relatively quiet week on the data front, US GDP for Q4 printed at 2.1% (annualised), a slight uptick from the expected 2.0%. Chinese data by way of PMIs was positive, with manufacturing printing in line with expectations at 50.0 (down from 50.2) and services improving to 54.1 from 53.5 (vs an expected print of 53.0). 

Outlook

The coming week will start with a focus on US primary elections, with the first of four Democratic primaries in February due to take place in Iowa. Polling currently suggests that Senator Bernie Sanders is in the lead, with former Vice President Joe Biden a close second. This is in particular one to watch due to the difference in policy stance between the two leading candidates, and the possible effect those policies may have on markets.

Away from politics, there are a number of data highlights to watch out for including PMIs from around the world and the US jobs reports for January. On the central bank front we will hear from the Reserve Bank of Australia, as well as decisions out of Brazil, India and Russia. 

Earnings seasons tapers off this week with 16% of the market capitalisation reporting, including the last of the tech names: Alphabet.

By Adam Kibble

The post Insight Multi-Asset update – week beginning 3 February, 2020 appeared first on AdviserVoice.

The signing of the ‘phase one’ deal between the US and China, constructive data releases and positive earnings stories for US banks buoyed global equities last week. Government bond yields were broadly flat, with the exception of UK gilts which tightened meaningfully owing to members of the Monetary Policy Committee (MPC) guiding towards an interest rate cut at the MPC meeting towards the end of this month.

Whilst on central bank policy, both Turkey and South Africa delivered a rate cut last week, with the latter surprising the market, and South Korea kept their rate the same in line with market expectations.

Data from China strikes a more positive tone, and secondary US survey data makes the US PMIs a close watch

The most significant data release came from China towards the end of the week, where we saw both stronger industrial production numbers (6.9% year-on-year vs an expected 5.9) and retail sales (8.0%, slightly above the expected 7.9%). These data provide reassurance for our view of stabilisation in Chinese growth. The year-on-year GDP also printed at 6% which was in line with expectations. In the US we also received a few data releases, which again support our view of growth improvement. Retail sales printed 0.7% month-on-month vs an expectation of 0.5% while the Philadelphia Fed Business Outlook was a strong beat. It will be interesting to monitor other regional data releases ahead of PMI and ISM prints as the size of current divergence is high relative to history. Last week’s data docket adds to our growing confidence that policy action across the globe in 2019 is having the desired growth impact and that the worst of the manufacturing slowdown seems to be in the rear-view mirror.

US earnings season kicked off with banks reporting strong results, but share-price reaction was muted

US earnings season kicked off in earnest last week with 8% of S&P 500 Index market capitalisation reporting. The expected EPS growth rate of -1.5% marks a continuation of the theme of sluggish profit growth seen in 2019. Revenue expectations remain positive at 3%, which highlights how margin pressures continue to drag on US corporate profitability. This week’s reporting schedule was dominated by financials, and in particular the banking sector. In aggregate US bank earnings were solid, with most banks beating analyst estimates thanks to big increases in trading revenue and strength in consumer-facing divisions. The latter provides some bottom-up confirmation on the health of the US consumer. Perhaps less reassuring was the share-price reaction to positive results, which was muted relative to how big the surprise was. This is something we will keep a close eye on over the next few weeks of the reporting season.

At long last, a ‘phase one’ deal between the US and China has been signed

Wednesday saw the signing of the phase one deal between the US and China, but there were no surprises relative to market expectations so price reaction was relatively muted. We did find out more detail about what the deal entails, with it being kept mostly under wraps until now. China has now committed to spend $200bn on American goods in order to bridge the trade imbalance, whilst also cracking down on intellectual property theft. On the former, CNBC reported that this commitment covers the following two years with a breakdown including manufactured goods ($77.7bn), energy goods ($52.4bn), services ($37.9bn) and agricultural goods of $32bn.

Whilst on the US, another snippet we heard last week that helped propel markets to fresh highs on Thursday was from Larry Kudlow, economic advisor to the White House, who hinted at a further tax cut plan later this northern hemisphere summer. However, this would require bipartisan approval and as such, may be challenging to implement. 

Outlook 

The highlight for data over the coming week is likely to be the release of the preliminary January PMIs on Friday, which should provide an insight to the global growth backdrop heading into 2020. We will see releases from Japan, Germany, France, the UK, US and the wider Eurozone.

 The US earnings season remains a key focus with a further 11% of S&P 500 Index constituents reporting. As we discussed above, share-price reaction has been muted so far this season, which is something we are keeping a close eye on. 

The central bank docket includes policy decisions from the European Central Bank, the Bank of Japan and the Bank of Canada, all of which are expected to keep rates unchanged. 

The US market is shut on Monday and the Chinese and Korean markets will be shut on Friday for the start of the Chinese and Korean New Year Holidays, respectively.

By Adan Kibble

The post Insight Multi-Asset update – week beginning 20 January, 2020 appeared first on AdviserVoice.

Market and economic review

Despite geopolitical tensions rising and a weak ISM print, 2020 has seen a strong start for risk assets. After the US-led assassination of Iranian Major General Qasem Soleimani, and the subsequent response from Iran, tensions seemed to calm with a speech from the US President Donald Trump. Whilst the market focused on these developments, PMI releases pointed towards continued stabilisation in the global economy.

In addition to the above, we received a steer from President Trump on how developments in the US-China trade war may progress from here. With the ‘Phase 1’ deal due to be signed this week, Trump said that ‘Phase Two’ negotiations should begin “right away”, although this was shortly followed by a claim that he may be able to negotiate a better deal after this year’s election has passed.

Against this backdrop, equities started the year strongly, with a notable outperformance of the largely cyclical semi-conductors sector, whilst global bond yields have broadly moved lower. In FX, emerging market currencies have been leading the way providing a sign that the markets view on the macroeconomic backdrop appears to be improving. Gold has had a very volatile start to the year – having peaked at a 7% increase during the height of the US-Iran tensions, it has since retraced those gains to be -3.6% year-to-date, as at the time of writing.

Tensions between the US and Iran increase, testing the markets’ ‘full-steam ahead’ start to the decade

The first real challenge for markets this decade came when news broke that a US airstrike had killed Major Qasem Soleimani, an Iranian military commander. In response, Iran’s supreme leader promised severe retaliation for those culpable, inciting fear amongst both markets and the general public of further escalation.

The reaction that followed on Tuesday was a series of missiles being fired at two US-Iraqi airbases. Both sides have stated they do not seek escalation of war and the response from Iran was, relative to the range of potential outcomes, relatively minor. The longevity and economic impact of this conflict appears to have somewhat faded given the rapid de-escalation we have seen since those events. However, it is clearly too early to presume this is the final chapter in the ongoing conflict between the US and Iran.

A weaker ISM than expected, followed by continued stabilisation in global PMIs and payrolls in line with expectations

On the data front, the decade began with a US ISM manufacturing print of 47.2 which undershot the expected 49.0. However, the non-manufacturing ISM print that followed was more constructive printing at 55 vs an expected 54.5, an increase from the previous month’s 53.9.

The market then looked to global PMIs, which were broadly positive, helping to bolster the view that the economy is making its way through a journey of stabilisation. The composite eurozone PMI was 50.9, 0.3pts above expectations, which was due to a shared improvement amongst both manufacturing and services. The strongest countries behind this uptick were Spain and Germany, whilst France printed in line with expectations and Italy slightly below. At a holistic level, we continue to monitor the impact of the poor manufacturing numbers experienced last year on the services component; however, it appears that this has mostly run its course.

Away from company surveys, the next potential hurdle for markets was the first US non-farm payrolls print of the year. This was released on Friday and caused no surprise for markets (at the time of writing) printing broadly in line with expectations, 145k vs 160k. This is 121k lower than the bumper 266k print in November; however, that number was boosted by the return of General Motors workers post their dispute over working conditions. Wage inflation printed mildly below expectation at 2.9% year-on-year and the unemployment rate remained stable at 3.5%.

Outlook

There are a number of noteworthy data releases in the week ahead, particularly from China. We will get data on China’s December trade balance, and exports and imports, which will provide a sense of the toll the trade war has taken. We will also get Q4 GDP, and December retail sales and industrial production numbers. Away from China, the US releases its latest inflation and retail sales numbers, and we will see European industrial production and inflation numbers.

There are various central bank decisions, from the Central Bank of Turkey, South Africa Reserve Bank and the Bank of Korea. The Federal Reserve’s Beige Book and European Central Bank’s monetary policy account of its December meeting (President Christine Lagarde’s first) will also be released.

Away from data and political developments, the US earnings season kicks off in earnest this week. The first week is dominated by the big banks (Citi, JP Morgan, Wells Fargo, Goldman Sachs and Merrill Lynch). Expectations are for negative earnings-per-share growth of -1.5%, while revenue growth looks likely to remain positive (+3%), highlighting how margin pressure continues to drag on corporate profitability. Earnings growth was subdued for all of 2019 and thus management guidance for revenue growth in 2020 will likely dictate share price reaction. Lastly, as mentioned above, the signing of the long-awaited Phase One deal is due to take place this Wednesday.

By Adam Kibble, investment specialist

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With news flow on the signing of a ‘Phase One’ deal between the US and China sparse relative to prior weeks, instead we will mainly focus on this week’s data releases. With Thanksgiving on Thursday, the end of the week was rather quiet with the release of data from the US being brought forward. On the whole it was a pretty mixed picture, which we will go on to discuss in further detail below.

November was a strong month for risk assets with equities performing well again last week. Global government bond yields have generally moved higher, led by US Treasuries. In FX space, developed market currencies have been relatively stable however emerging market currencies, and in particular the Brazilian real, Chilean peso and Colombian peso, have been volatile due to idiosyncratic stories.

A light week for data which included an upward revision to US GDP and a small uptick in European inflation numbers

A raft of data releases came from the US last week. Jobless claims fell to 213,000 from 228,000, below the consensus of 221,000. This enforces the idea that more recent elevated prints may have been in part due to specific occurrences such as the California wildfires. Continuing claims also fell.

Whilst it may be classed as second tier data, the Chicago PMI was an interesting release given the October print (43.2) materially undershot expectations. The expectation was a bounce back to 47, however it printed at 46.3. Lastly from the US, Q3 year-on-year (yoy) GDP growth was revised to 2.1% from 1.9% due to faster inventory-building and a less than expected fall in business investment.

Germany produced a slightly lower than expected inflation print. The expectation was for a small uptick to 1.2% yoy from 1.1%, however it remained at 1.1%. Slightly stronger prints came from France (1.0% yoy, up from 0.8%) and Spain (0.4% yoy, up from 0.1%). These numbers come post a speech from the European Central Bank (ECB) President Christine Lagarde last week, who urged countries to offer fiscal support in order to stimulate the European economy.

President Trump passes the Hong Kong Democracy Act, but it remains unclear whether this will impact negotiations towards the signing of a ‘Phase One’ deal

With trade-related news less prominent than in recent weeks, the main focus was on the implications of President Trump signing legislation that expresses US support for Hong Kong protesters into law. This bill requires an annual review of Hong Kong’s special trade status under American law, and possible sanctions on officials deemed responsible for human rights abuses. The bill had already been passed by the house, and was due to become law if President Trump did not sign or veto it by 3 December regardless.

As expected, this was not received well by officials in China. That said, we have yet to see as much of a response as some would have predicted. What we have heard from the state-run Global Times is that China may consider putting drafters of the bill onto a no-entry list. We should see whether the passing of this bill impacts the signing of a Phase One deal in the weeks that follow.

Outlook

The coming week brings data releases that should help guide markets into year-end with global PMIs likely to be the focal point. In addition to those, we will also see data on US job reports (non-farm payrolls, unemployment rate, average earnings, etc.) and the ISM print.

Outside of data, we will hear once again from ECB President Lagarde and also the results of various central bank decisions across the globe, including Canada and Australia.

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With little data to focus on in the early part of last week, and following on from our recent updates, markets continued to be dominated by the ebb and flow of news on the trade war between the US and China. Towards the end of the week, preliminary PMIs were released, suggesting a picture of stabilisation in manufacturing at a low level, and continued decline in services. And lastly, we heard from both the Federal Reserve (Fed) and European Central Bank (ECB).

Against this backdrop, equities ended the week broadly flat and government bond yields fell slightly. Volatility in FX has been particularly low, with most currencies remaining relatively stable.

News on a ‘Phase One’ deal between the US and China continues to drive risk sentiment

As mentioned above, news on a ‘Phase One’ deal between the US and China continues to act as the conductor to the market’s melody. The most recent verse of which points to a more positive tone; however, it is still very much up in the air.

Towards the end of the week, news from the US reported that China’s chief negotiator, Vice Premier Liu He, had invited US negotiators for further talks. However, the mood music soured as the report moved on to say the US team were reluctant to make the trip to Beijing without receiving commitments from China on agricultural purchases, intellectual-property protection and forced technology transfers.

Seemingly singing from a different hymn sheet, news from the South China Morning Post was slightly more upbeat. They reported that someone close to the Trump administration suggested that even if the ‘Phase One’ deal was not signed by 15 December, then the tariffs due on that day would be postponed as the two parties are close to an agreement.

PMI data points to a stabilisation in manufacturing but weaker services

The main data focus last week was the release of the November PMIs. The eurozone composite PMI undershot expectations by 0.6, printing at 50.3. Within this, the manufacturing PMI was slightly higher than expected (46.6 vs 46.4), but the services PMI disappointed (51.5 vs an expected 52.4). Overall, there is evidence of the gap between manufacturing and services closing, but that appears to be driven by services being dragged down towards contractionary territory whilst manufacturing stabilises at a low level.

PMIs out of Japan were most positive, with both manufacturing and services beating expectations, resulting in a composite print of 49.9 vs a prior month of 49.1.

Outside of PMIs, we also saw the release of US housing data, which has been more constructive, with both housing starts and building permits increasing month on month, by 3.8% and 5.0%, respectively.

No surprises in the Fed meeting minutes, and a call for fiscal support from the ECB President Christine Lagarde

The Federal Open Market Committee (FOMC) minutes provided nothing by way of new substance. As expected, Fed officials continue to see risks tilted to the downside; however, it is their view that some of those risks have improved of late. Overall, the committee believes that interest rates are now at an “appropriate level” and are “well-calibrated” to support the Fed’s objectives. Interestingly, there was also a discussion on negative interest rates as a policy tool, which concluded with all participants agreeing on the unattractiveness of that as an option.

We also heard from Christine Lagarde, president of the ECB, in her first speech in the new role. The call was for a new policy mix for Europe, to enable the economy to thrive in an increasingly uncertain global situation. President Lagarde said that whilst monetary policy will continue to support the economy, it is key that there is higher spending on the fiscal front. Clearly this would be positive for European risk assets; however, we believe that the hurdle for meaningful fiscal support from Germany remains high.

Outlook

In the week ahead, we will see the latest European inflation data. Having seen last month’s annualised print falling to 0.7%, the lowest since November 2016, this will no doubt be closely watched as a potential indication of future policy from the ECB. We will also see confidence indicators and unemployment numbers from Europe, whilst the highlight from the US is the second estimate of Q3 GDP. By way of second-tier data, regional PMIs in the US and the German IFO numbers will also be released.

Outside of data there is not too much else to concentrate on: the Fed releases their beige book, and we will hear from several ECB speakers.

By Adam Kibble, Investment Specialist

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