The last days of the old year and the beginning of this year was not for the faint-hearted. The equity markets took a dive until year-end and started furiously into the 1st quarter, which hardly anyone could have imagined.
The central banks, led by the Federal Reserve, have been the main contributers to this ride. Their guidance to the markets was hawkish, meaning that the interest rate hikes will go on in 2019. The ECB also stopped their purchase program and was clearly expected to start with interest rate increases. Although the global economies showed first sings of weakness at the end of last year, the banks kept on to this guidance for the markets.
Finally the central bankers changed their tone and sent the message that they are clearly taking into account the latest developments and will be pragmatic. This was the moment, when the markets started to rise because the risks of a recession due to a tight monetary policy were abating. Not even the longest shutdown of the US administration in history could alter the positive picture.
This year will be a challenging one for the investment professionals, the old wisdom to not put all eggs in one basket is more valid than ever. The bond markets will see no massive rate increases due to the above mentioned monetary policies. Since we are at the end of a long cycle large swings in spreads of corporate bonds are highly probable. Hard currency bonds from Emerging Market Governments are on the other hand more attractive, because they have been badly hit in 2018 and are now relatively attractive.
The equity markets have now a much more benign situation due to the new the guidance from the central bankers. The earnings situation is still solid and the ongoing earnings growth will also be supportive in this development
Author:
Martin Bruckner,
Member of the Management Board
Allianz Investmentbank AG
CIO Allianz Group Austria
31 January 2019
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.