Global Liquidity Market & Portfolio Commentary - J.P. Morgan Asset Management

Global Liquidity Market & Portfolio Commentary

Q4 in review: In a risk-off quarter, a Brexit waiting game

UK & Europe
  • Market participants were increasingly concerned about trade wars, a U.S. recession, a global slowdown, Brexit, politics in Europe, credit market leverage and deteriorating market liquidity; amid late-cycle concerns, we continue to adopt an up-in-quality bias.
  • The eurozone economy has dropped a gear—leading indicators trended steadily lower through the quarter, although domestic demand remained relatively strong.
  • In the UK, the direction of rates depends on the Brexit outcome; our view remains that a deal will be reached and that we will see higher rates this year.
  • The European Central Bank (ECB) set a balanced tone in December, describing a dovish taper in which quantitative easing comes to an end while rates remain at -40 basis points, at least through the summer. We think the ECB could move quicker than current market expectations, but cash yields are unlikely to hit positive levels in the near future.
  • In December, Global Liquidity transitioned to conform to the new European Money Market Fund Reform rules, launching two new fund strategies: Low Volatility Net Asset Value (LVNAV) and Variable Net Asset Value (VNAV).
  • The fourth quarter was tumultuous as uncertainty about trade, earnings growth, a possible global slowdown and a plunge in energy prices roiled markets, culminating in a sharp risk-off movement and high volatility.
  • As expected, the Federal Reserve raised rates in December and telegraphed two, not three, rate hikes in 2019, characterizing risks as “roughly balanced.” The U.S. economy continued to grow above trend, wages rose to new cycle highs, retail sales were strong and core inflation remained stable over the quarter.
  • Brexit was also in focus as EU member states approved UK Prime Minister Theresa May’s Withdrawal Agreement proposal. However several of her cabinet ministers resigned in protest and the vote was postponed to January 15, 2019.
  • Oil prices plummeted over the quarter. While Q3 earnings and revenues continued to grow, some corporations’ less optimistic earnings guidance sparked worries that earnings have peaked.
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