Economic Update June 2018
IFM Investors Economic Update
As we approach the mid-point of 2018, it seems appropriate to look back to see how markets have performed so far this year, and why. Much of the repricing of US equity and bond markets took place in the first month of the year. This was prompted
by investors seeing returns upside, with the prospect of better economic outcomes being underpinned by front-loaded fiscal stimulus from the US government. This was true of government spending and household and corporate tax cuts – the
latter having a direct earnings impact for US corporates. The fiscal stimulus also drove an increase in bond yields, as GDP and inflation forecasts were revised higher, and with them expectations of a more aggressive tightening cycle by the
Federal Reserve (Fed). Yet ironically there was too much of a good thing and the repricing in bond markets seemingly sparked a selloff in equities as valuations came under pressure. This saw equites more than relinquish January’s gains
and, despite a recovery through February, they have largely range traded through subsequent months.
Chart 1: Global - Major asset class returns 2018 YTD
Increased volatility and lower returns pervade key listed markets
Source: IFM Investors, Bloomberg
Further consistent gains since February have seemingly been capped by two key factors. The first is that the upside surprise from global economies has not been getting materially better, nor is it expected to – most of the economic ‘good
news’ has been priced in. This is particularly true of economies outside of the US, where higher frequency data is showing signs of having peaked.
US data flow remains solid and is adding some buoyancy to markets, but this is interspersed with a second factor – heightened geopolitical risks. Markets have lurched due to rising and falling tensions around key global issues, including
North Korea-US relations, US-China “trade wars”, US-Iran/Middle East/Oil, Brexit, and Italian politics to name a few. These factors have defined much of the price action in equity markets. They have also capped the rise in US bond
yields, via safe haven flows, as the prospect of stronger inflation and a more aggressive Fed pushed 10-year treasuries temporarily above 3%, with investors seemingly considering at what levels of bond yields it is appropriate and/or prudent
to take some risk off the table.
About the author
Alex Joiner, PhD
Joined in 2016
Alex Joiner is Chief Economist at IFM Investors. He is responsible for the firm’s economic, financial market and geopolitical risk analysis that is key in IFM’s investment process. In this capacity he engages with IFM’s domestic and global clients on macro-investment trends and themes. He is a frequent commentator on economic and markets via traditional and social media and regularly speaks at public forums and conferences. He has over two decades of professional experience in economic and markets and prior to joining IFM was the Chief Economist at Bank of America Merrill Lynch (Australian & New Zealand) after being a senior economist at ANZ Bank. He holds a First Class honours degree in Economics and a PhD in Econometrics from Monash University. Alex is also committee member of the Australian Business Economists.