30 Jun 2019
Global Liquidity Market & Portfolio Commentary
Q2 2019 in Review: Positioning for rate cuts and recession risk
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UK & Europe
- The trade war escalated in the quarter and central banks turned increasingly dovish in hopes of averting recession. European exports and manufacturing remain weak and inflation expectations are at all-time lows; Britain continued to struggle with Brexit paralysis and political uncertainty.
- Risks in the eurozone appear tilted to the downside with the market pricing in rate cuts below the current lower bound on deposit rates (– 40 basis points) within a year.
- In the UK, the clouds over the global economy alone suggest rate cuts ahead. That both candidates for prime minister are open to a no-deal Brexit makes a wide array of political scenarios possible, leading us to expect rate cuts and continued volatility.
- We extended duration in all strategies while maintaining an up-in-quality bias.
- Markets rallied over the second quarter despite a mid-quarter flight to quality when the Trump Administration abruptly escalated trade tensions; risk assets rebounded when tensions eased.
- Labor markets and consumer confidence remain strong but leading indicators including business confidence and fixed investment have weakened, signaling risk.
- The Federal Reserve (Fed) left rates unchanged at its June meeting but, noting multiple threats to growth, said it might act to forestall a downturn. We expect the Fed to cut rates two or three times this year, starting in July.
- We favor high-quality credit. We extended duration in Liquidity and Managed Reserves and stayed neutral to benchmark duration in Short Duration.
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