Weekly Market Recap

Diversification dampened

05/10/2020

Week in review

Australia building approvals decline 1.6% m/m
Australia private sector credit growth flat m/m
Australia national house prices fall 0.1% m/m

Week ahead

Australia Government Budget
RBA policy announcement
U.S. labour market report

Thought of the week

The broad risk-off sentiment in the past few weeks is not unusual given the risks to the outlook. Rising COVID cases across Europe, further restrictions on services industries, the pending U.S. election and fading hopes of further fiscal stimulus are all weighing on investor sentiment. These events will pass and clarity will return to the market allowing a listless market to regain direction, which ever way it may be. However, more troubling for asset allocators is how to hedge against these risks. The yield on the U.S. 10 year government bond has barely budged as economic data surprised to the upside or when equities sold off. In the past government bonds were the ballast in portfolios that allowed investors to load up on risk in the knowledge that they would offer some protection. Today, the forward guidance of central banks that rates will remain well anchored for some time is weighing on yields across the curve greatly reducing their diversification benefit.

Bond yields are not sensitive to the surprises any longer
10y U.S. govt bond yield and U.S. Citi Economic Surprise index

Source: Citi, Tullet Prebon, FactSet, J.P. Morgan Asset Management, all returns in local currency unless otherwise stated.
Equity price levels and returns: Levels are prices and returns represent total returns for stated period.
Bond yields and returns: Yields are yield to maturity for government bonds and yield to worst for corporate bonds. All returns represent total returns. AusBond Comp is the AusBond Composite 0+ Yr, AusBond IG is the AusBond Credit 0+ Yr both provided by Bloomberg.
Currencies: All cross rates are against the Australian dollar. An appreciation of the foreign currency against the Australian dollar would be positive and a depreciation of the foreign currency against the Australian dollar would be negative.

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