Mr. Market’s message for 2019
A recent occurrence that is much monitored by global investors is the inversion of the yield curve. An upward sloping yield curve illustrates investors’ desire for higher returns in the long end in light of unexpected future risks. A downward sloping yield curve predicts lower future interest levels amidst a forecasted economic slowdown. Although an inverted yield curve is not a certain indicator of an imminent recession it has proven to be a solid indicator in the past, having preceded seven past US recessions.
In late November, in a speech at the economic club of New York, Chairman Jerome Powell finally delivered a dovish rhetoric as he claimed that rates are closing in on “neutral” level. Emerging markets received a boost but although US equities were initially strengthened they have since resumed their slide.
How will this affect the EM credit space? A weakening US dollar will have a positive impact as it will ease the pressure of economies that have large dollar debt obligations. Moreover, an easing of 10-year US treasury yields should lead to some tightening of spreads. However, a big majority of EM players are commodity exporters and the oil slump will inadvertently affect their economies. This month’s production cut by OPEC+ of 1.2bn barrels per day has had little impact in lifting oil prices. Economists explain this lack of price support to be a timing issue as production cuts will in time affect respective inventories. Moreover, the broader market selloff acts as a further factor weighing on sentiment. Investors now await for Saudi to plan further supply cuts to the US and for China to propose significant fiscal reforms to strengthen their economy and stimulate global demand.
The main remaining other risks include the US China trade wars, the Italian reforms as well as Brexit which will undoubtably infuse volatility into the markets.
However, the largest threat to global growth is a US economic slowdown. It is up to US Fed Chairman, Jerome Powell, to undertake this very challenging task of correctly pacing monetary policy to maintain inflationary targets without impeding growth. Persella Ioannides is a Director at Meritkapital Ltd, a CySEC licensed investment firm rendering brokerage (DMA), investment advice, asset management and custody services. www.meritkapital.com