- Markets are in risk-on mode
- News from US-China trade negotiations feeding a more positive feeling
- Selling high yield corporate bonds into rally and moving proceeds to US government bonds
Anthony Rayner, manager of Miton’s multi asset fund range, told IFA Magazine:
“Having entered the second quarter, many stock market indices are close to multi-month highs and the widely followed Junk Bond ETF is close to an all-time total return high. Meanwhile, the emerging market currency index looks pretty stable, despite broad-based US dollar strength. Looking beneath the aggregate indices, economically sensitive companies are generally outperforming the more defensive businesses. Markets are in risk-on mode.
“The impetus for the rally primarily lies with the significant change in narrative from the US Federal Reserve on 4 January, where it indicated a pause in raising rates.
“However, there have since been a number of other developments. In terms of the data environment, there have been some better than expected numbers coming out of the powerhouse US and Chinese economies. For sure, there will be a recession at some point, but the market narrative has moved to ‘slowdown averted’ mode for now. Meanwhile, there are continued signs of decent wage growth but no signs of it feeding through to consumer price inflation. Goldilocks, the sequel?
“The drip-drip news from the US-China trade negotiations has been feeding a more positive feeling too. The US president wants to take a message into the 2020 presidential elections of strong negotiations having taken place with trading partners, but also a strong US economic and stock market environment. This suggests that hard negotiating will likely fade, even if some rhetoric for Trump’s core base continues. Similarly, rhetoric for easier Fed policy, including a reversion to QE, should be expected to continue from Trump.
“Markets will soon start to focus on the first quarter earnings season. This might help trigger a clearer leadership in equity markets. In the meantime, we retain a fairly decent exposure to better quality highly liquid and less leveraged equities and, in the bond space, continue to sell high yield corporate bonds into the rally. We are moving the proceeds into US government bonds which provide better liquidity and some safe-haven characteristics.”