Weekly: Breathing space
- Fed and ECB have taken on an asymmetric monetary policy stance...
- …the bar to tighten is much higher than the bar to ease
- A limited US-China trade deal takes away uncertainty for at least a few months
- We expect equity froth to remain, US dollar to weaken, yields to rise, and EM to rally
- This presents considerable breathing room for markets and economies going into 2020
From the Fed to ECB to phase one trade deal to UK elections—everything has gone the markets’ way this week. This presents considerable breathing room for markets and economies going into 2020.
First, the year’s final monetary policy meetings from key central banks paved the way for a highly accommodative stance to be maintained in 2020. Both the Fed and ECB have taken on an asymmetric monetary policy stance—the bar to tighten is much higher than the bar to ease. Consequently, even if inflation picks up a tad next year, there will be little concern about monetary policy turning hawkish.
In her first meeting as ECB president, Christine Lagarde made it clear that interest rates will stay at record lows in 2020, although she saw a modest pick-up in lending and a marginal improvement in the outlook. Receding risk of a disorderly Brexit and some improvement in trade related sentiment will likely help reduce the pernicious risk of negative rates in the Eurozone, in our view.
In the US, the Federal Reserve also signalled a prolonged pause ahead, with a striking asymmetry in the policy stance. By announcing a dramatic increase in market intervention (through repurchase operations), the Fed also made it clear that it is determined to avoid the type of cash crunch that disrupted markets in September. From our perspective, the Fed has clearly moved on from the “midcycle adjustment” type thinking to a more dovish strategy, with a pledge to hold rates low as long as inflation is muted. In this context, what is remarkable is the convergence of views among FOMC participants: in September, seven out of the twelve expected the Fed funds rate to be above 2% in 2020; this week everyone saw the rate to be below 2% next year.
After months of back and forth and scaling back of the scope of trade negotiations, a limited US-China trade deal arguably reduces global market uncertainty for at least a few months. Key issues remain unresolved, however, leaving considerable risk on the table for next year.
The contours of the phase one agreement feature the following:
• China to import USD50bn worth of farm goods annually (the corresponding figure in 2017 was USD24bn).
• China to tighten intellectual property protection.
• China to open up its financial services market to US companies.
• US to refrain from imposing new tariffs on Chinese goods bound for the US.
• Existing tariff on USD360bn of Chinese goods will be partially rolled back.
• Tariffs can be snapped back if China does not live up to its obligations in the deal.
Thornier issues like subsidies for state enterprises and technology transfer will be part of a subsequent deal, which will take at least another year or longer.
Exit polls suggest a resounding win for the UK Conservative Party under the leadership of Boris Johnson, paving the way for Brexit next month. The considerable majority will help PM Johnson to end the three-year political standoff, and move on to negotiating a post-Brexit trade deal with the EU. Independent of how challenging or protracted those negotiations turn out to be next year, the short-term implication for UK markets is unambiguously positive, with the British Pound the clearest beneficiary.
What do these developments mean for the early part of 2020?
• Already expensive equity markets to become even more costly, riding on a relief rally with so many uncertainties dissipating.
• Capital flows to become more emerging markets oriented (helping hard currency debt issuers) and the US dollar to weaken as non-US prospects improve.
• Fixed income curves in developed markets bull steepen somewhat.
To read the full report, click here to Download the PDF.
The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.
DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422.