• January 10th, 2020
• By Midsilver Investment Limited

US-China trade tensions began to relax in October, propelling a surge of confidence in global financial markets. Throughout September, the value of risky assets globally remained consistent, buoyed by increased monetary support amidst tempered global activity forecasts. As optimism grew, stocks saw significant appreciation in almost every market except China, while credit spreads narrowed. The momentum of expanding term spreads in advanced economies (AEs) slowed after a few weeks.

In response to consistently low inflation rates and a lukewarm growth projection, numerous major economies saw their central banks adopt more lenient policies. The United States, the Eurozone, and several emerging market economies (EMEs) like Brazil, China, Indonesia, and Mexico reduced their policy rates. The European Central Bank reintroduced its government bond purchase program.

Positive developments in US-China relations, combined with increasing hope for a smooth Brexit transition, boosted equity values worldwide, except in China where stock values declined during October and November. In the US, stock values reached unprecedented heights, driven by a robust consumer sector, early indicators of manufacturing stabilization, and earnings reports that either met or slightly exceeded anticipatory figures. Growing optimism was further bolstered by sporadic evidence in October's activity metrics suggesting that numerous economies, both advanced and emerging, were on the brink of recovery.

Globally, corporate spreads declined and long-term sovereign yields in AEs increased. Spreads for corporate bonds in both the Eurozone and the US dropped, particularly for those rated investment grade. Spreads in the high-yield category, as well as for EME corporates, expanded in late September but tightened again by mid-October following more upbeat news. Government bond yields also increased, leading to steeper yield curves, although the yields on long-term bonds receded somewhat in November.

The US dollar lost strength, especially against EME currencies, as the demand for secure assets dwindled. Sovereign yields in EMEs remained largely unaffected by these shifts in sentiment and persisted in the downward trajectory that had been evident for most of the year.