An Emerging-Market Breakaway
In a still languid global growth environment, hopes for greater government monetary and fiscal stimulus are having an outsized effect on financial markets. Following expansive quantitative easing programs in Europe and Japan, market speculation of a parallel Chinese offering underway sent the country’s stocks rallying and finally got emerging-market (EM) stocks out of a two-year funk. We think the EM rally has some legs.
European Bond Yields in Bunch Sprint
Global bond yields, on the other hand, mostly traded in a tight range until German bunds sold off in late April, at least in part due to data suggesting a firming in euro-area consumer prices. The rise in yields was most dramatic in Europe, but we think large central bank purchases should keep European yields at low levels for the next several quarters.
Another Tough Climb for the First Quarter
In the United States, first-quarter gross domestic product (GDP) growth was downcast along with most other key economic indicators, increasing the chances of the Federal Reserve (Fed) holding off its interest rate hikes until later in the year. While we prefer to see the Fed depart from its zero interest rate policy sooner rather than later, we don’t expect a hike before September and believe a single increase for the year is a likely scenario. The U.S. growth outlook has dimmed, but the recent slowdown is probably a temporary setback. We see the economy reaccelerating in the second half.
Momentum Trades: No Safety in Numbers
It does not take much market volatility for momentum trades to unravel— demonstrated by the recent tumble in biotechnology stocks and bond proxies— which we have been warning about for some time now. As we get closer to a Fed rate increase, volatility could pick up. We continue to prefer a portfolio that overweights international stocks and underweights bonds.