24th January Market Commentary

2020 has kicked off with a record binge amount of debt issuance across governments, banks and corporates in Europe, whilst the rest of the world has also been sure not to miss the party.

With record-low rates and the potential to give back less than you have borrowed, what is not to like? Well, with the level of current political uncertainty, low growth and greater protectionism, quite a lot from the perspective of a fixed income investor.

We also find ourselves in a place where credit spreads are compressed and thus the compensation for taking on additional risk is rather low. With stocks in several major markets teetering around all-time highs and the acknowledgement that we must now be “late-cycle”, the question of how and where to invest, or at the very least park cash, continues to be of utmost importance. Central banks are betting on the return of inflation to magically disappear the debt. Not to be a merchant of doom, but this is a pretty high-risk and big stakes bet – some might say that they have gone all in!

The price action in Sterling over the last couple of weeks has been volatile, to say the least. All three maturities on offer at the UK T-Bill auction this week cleared at levels lower than we have seen for a long time – in the low 0.60’s at their highest. Expectation of a cut is at the forefront of investors' minds, as well as trading books. Whilst the probability of the Bank of England easing to 0.50% has backed up to around 50% on January 30 (I keep changing this, correct at the time of writing!), just a couple of sessions ago it was almost at 80%. A record number of people employed as well as unexpected optimism from UK manufacturers has taken some wind out of the sails of this potential new year gift for those of us with floating-rate mortgages…

Dollars continue to pour into the short-term markets from the Federal Reserve, keeping a lid on short-dated USD returns, at least for now. Whilst there is a stated desire to wean the market off of the drugs provided by cash injections into the repo market, the Fed’s ability to do so has come into question given that not much has changed in the wider political and economic context. If we cast our minds back just 12 months, the Fed’s dot-plot was projecting two hikes in 2019 – in the end what we actually saw was “mid-cycle easing” in the form of three cuts… Time will tell whether this was the right decision but, whatever your opinion, investors might do well to pay attention to how wrong those projections were. I would suggest that saving the shrinking stockpile of ammunition might be prudent right now.

Happy Friday!

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