Did the US Fed blink?
Bond markets certainly think so, with the yield on the benchmark US ten-year falling to 2.6% from 3.25% at the end of 2018 in renewed safe-haven trade.
This reflected a vote of no confidence in the Fed’s tightening policy, with the dollar – the main beneficiary of the Fed’s hawkish stance – losing ground in response.
It indicated a likelihood that the US central bank will have to reverse its rate-hiking path and start reducing interest rates again over the next 12 months.
Confidence has also returned to the local bond market, with the yield of 9.5% on the R186 in the second half of 2018 clearly presenting a good buying opportunity at the top, with the yield falling to a present 8.8% as bond prices rose inversely.
Equity markets have been a bit slower on the uptake, adopting a more sceptical approach.
The Dow Jones and MSCI World Index are still firmly in negative territory on an annual basis, despite some uptick since the start of the year.
The JSE All Share started the year flat after retreating 13% in 2018.Global equity markets experienced the worst December in decades after the Fed increased rates to 2.5% at its last meeting of 2018, seemingly also keeping the door open for at least three further hikes in 2019.
That spooked markets to no end, with the prevailing view that the US will fall into recession in 2020.
Fed chair Jerome Powell appeared somewhat surprised at the market’s reaction and emphasised that the economic environment still looked good.
The country's GDP was set to grow between 2% to 3% over the next two years.
He dispelled the fears of an imminent downturn, saying the markets “overreacted”.
The market view is that the Fed is pausing, and can afford to do so due to the relatively firm US economy.
But other worries remain. Inflation in the US remains subdued.
Can that really support further hikes in 2019?
In a way the Fed only has itself to blame for the hiccup.
Towards the end of last year Federal Open Market Committee (FOMC) members abandoned their commitment to an “accommodative” monetary stance, as reflected in the Fed statement issued after the meeting.
Neither was mention made that further hikes would be data dependent, another mantra for the markets.
This confused many investors – those who religiously comb through every Fed statement to detect a shift in sentiment, and through which money can be made in future. Or lost.For now, Powell’s soothing remarks have worked.
The Dow is up a percentage point or two in January, but the mood remains fragile.
Further volatile trade is to be expected, especially because the US-China trade impasse remains a reality.
Ongoing trade talks between the countries are a positive development.
Progress has been made on commercial issues, such as with trade in soya beans.
But issues around the opening of the Chinese domestic market, and intellectual property ownership in the tech sector, remain sticking points.
The stakes are high.
The US’ nominal GDP of $20tr, and China’s $14tr, according to latest data, clearly illustrate the serious knock-on effects further tensions between the two elephants in the room could have on the global economy.
That is one of the reasons the European Central Bank (ECB) has been ultra-cautious in relinquishing its stimulatory stance.
The Brexit imbroglio being the other.
FAANG stocks, reflecting the likes of Facebook, Amazon, Google and Netflix, are still in bear territory, or close to it.
Apple’s negative trading update revealed expected lower sales in China, causing ripples in the highflying sector.
And just as some semblance of stabilisation seemed to set in, another shock hit the market, this time from Amazon where CEO and the world’s wealthiest man, Jeff Bezos, is embroiled in a messy divorce saga.
This could lead to a potentially debilitating change in control at the global giant, based on Bezos’s $140bn equity interest.
In a sense the Fed did not blink. It is firmly sticking to its strategy of monetary policy normalisation, with Powell indicating he will not resign, even if ordered by US President Donald Trump to do so.
However, the fact that it is pausing with further hikes should provide support to the markets, hopefully allaying some concern about a possible crash a la the one in October 1987, when the Dow tumbled more than 20% in one day.
What markets clearly want from the Fed now is further reassurances that it will not hike rates further as part of a set policy, thereby breaching the neutral level to a stance where higher rates will damage the market irrevocably.
Should this happen in an environment of softer economic data, markets are bound to react negatively.
Which will be exacerbated by any further tensions with China.
Or a chaotic, no-deal Brexit.Markets in the past have always been characterised by periodic bouts of weakness, before recovering over the longer term.
It will truly be a happening of historic proportions should the Fed successfully manage the present downturn to be only a blip in the trajectory of the future.
Bond yields are crucial in this respect and the main indicator to watch.
Maarten Mittner is a freelance financial journalist and a markets expert.