Investors still clinging to monetary policy
There is no shortage of flashpoints at present. Whether Italy, Trump, Turkey, the fast-approaching Brexit or the simmering trade conflict, investors don’t have very far to go to find good reasons for taking a defensive stance. Nonetheless, the aversion to risk on the market is actually low. The global equity markets are still performing well, Bund yields have risen again while periphery spreads have tightened recently, and there is no sign of an increased risk aversion on the currency markets. The financial markets seem thoroughly relaxed in spite all of these flashpoints. There are of course some exceptions, such as a few of the emerging market currencies, whose devaluation is, however, primarily due to local factors (the fact that these are not reflected in the broader EM spectrum and with the consequent absence of any major contagion effects even confirms how relaxed the market is at present).
The economic environment, which can still be described as robust, is one of the reasons for the market’s resilience. The US is likely to record growth of nearly 3% (Y/Y) in 2018. Solid growth of 1.9% is expected for the eurozone, while the global economy should grow by a strong 3.6%. With inflationary momentum remaining very muted at the same time, the central banks are only under moderate pressure to act. We also see this as a decisive factor contributing to the current relaxed state of the market. Even though one or other central bank has already taken restrictive steps, the orientation of global monetary policy remains expansionary. Although growth in the large central banks’ total assets has eased noticeably, there is still no question of a more restrictive pace being taken overall (see chart). Rather, investors quite clearly trust the willingness of the central banks to provide supportive intervention in an emergency. As long as this is the case, the market is likely to stay relaxed ahead of further crises.
Aggregate total assets (Fed, ECB, BoE, BoJ and Riksbank)
(left hand side: USD trillion; right hand side: Y/Y in percent)