• April 8th, 2019
• By Midsilver Investment Limited

Market developments during the reviewed period were largely influenced by the changing outlooks for growth and monetary policy in key economies. In December, apprehensions about a stringent monetary policy amidst a weakening global economy led to a sharp decline in the prices of risky assets. However, from January onward, a softer approach to policy coupled with better economic indicators from the U.S. reversed this trend.

As 2018 neared its end, global markets felt the strain from concerns about economic growth and amplified attention to policy uncertainties, causing a surge in safe-haven investments. Stock prices declined and the difference in corporate bond yields expanded worldwide. Yields on government bonds decreased, with a minor flattening of the yield curves as term premiums reduced. U.S. assets underwent a notable devaluation during this broad market reassessment. On the other hand, emerging market economies (EMEs) displayed resilience, even with China's decelerating economy. An indication of tightening monetary conditions was evident when high-yield corporate bond funds saw substantial withdrawals, and the issuance of low-rated loans and bonds dwindled.

In January, financial markets regained stability after central banks signaled their readiness to modify monetary policies based on global economic risks. The Federal Reserve emphasized its decisions on interest rates and balance sheets would hinge on data, maintaining its policy rates and pointing out global economic and inflationary concerns. The ECB brought attention to escalating growth risks in the eurozone, assuring its preparedness to utilize all available policy instruments. Concurrently, the People's Bank of China infused a substantial amount of liquidity into its banking system and unveiled new policy measures, all in a bid to rejuvenate the decelerating economy and strengthen bank lending.

Spurred by these policy interventions and a renewed sense of optimism, global markets witnessed a surge in January and February. Reassurances on the U.S. monetary policy, combined with unexpectedly positive U.S. macroeconomic data, ignited a rally in risky assets. Stocks and corporate bonds recuperated from previous setbacks, displaying significant synchronicity across nations. The prices of commodities such as oil and industrial metals saw a revival. In EMEs, an initial decline in the dollar value played a part in maintaining investments in fixed income and equity funds, with government bond yields decreasing after remaining unchanged at year's end. Although these investments continued throughout the reviewed period, they did so at a reduced pace due to the strengthening of the dollar.

Meanwhile, Europe's financial trajectory at certain points deviated from the globally cautious yet improving sentiment. Initial sovereign risks in Europe reduced, but later gained momentum. Despite consistent economic challenges, the difference in Italian government bond yields decreased in January but rose slightly in February. Meanwhile, yields on German bonds continued their descent, reaching a two-year low. As the clarity surrounding Brexit deteriorated, both the British pound and UK government bond yields remained relatively stable, with UK stock prices on the rise.