Following the company reporting season, the second quarter will see macro issues to the fore. Current attention given to politics in the UK and EU will likely give way to a focus on the global economy. The UK has not decoupled from the global economic cycle, even though its growth is holding up better than other major EU countries. Key issues for markets will be Chinese stimulus, global liquidity, and whether the US yield curve retains its historic importance as a warning signal.
Yield inversion – a lower 10 year treasury yield versus three months – has previously been a reliable signal of a US recession. But in the decade since the global financial crisis, regulation and unprecedented monetary policy have changed investor behaviour. An ageing population and need for regulatory capital, are fuelling demand for long dated and safe assets. This search for long term secure assets tends to depress longer dated yields. And some technical hedging activities have also distorted the yield curve. When inversion did work as a signal between 1971 and 2006, the 12 months following actually produced positive returns, albeit below average.
Although Europe’s economy is slowing, the US remains robust, with consistent jobs growth and strong performance by service sectors. If China and US trade issues do not escalate, 2019 could be another year of satisfactory global growth. Even if the US Fed begins to withdraw liquidity, the EU and China are likely to keep easy monetary policy. Investors should find this global growth a favourable background for stockpicking. And, the Brexit turmoil has exposed opportunity in UK shares, in particular.