In 2019 financial markets were dominated by a couple of major themes. After a sharp correction in risky assets in the fourth quarter of 2018, markets rebounded quickly at the start of 2019. The biggest driver for the rebound was the shift in monetary policy. Towards the end of 2018 the US central bank, the Federal Reserve (Fed) was on the path of hiking rates. The European Central Bank (ECB) was terminating its bond buying (QE) program. More restrictive monetary policy was the trend.
Supportive monetary policy
This all changed at the start of 2019 when the Fed started to hint at a trend reversal and started discussions about lowering rates. In the second half of 2019 the Fed started lowering rates and the federal fund rate dropped with three cuts from 2.5% at the start of the year to 1.75% at year-end. During the year the ECB joined by reinstating a new QE program. The tailwind of renewed monetary expansions kick-started a rally across all asset classes.
Politics drive volatility
Over the course of the year geopolitics were causing increased volatility on financial markets. Especially the negotiations on a trade deal between the US and China dominated headlines. The US administration has a few key topics they want to cover: 1) Improve the trade balance between the US and China; 2) Support local US manufacturing; and 3) Improve regulation around Intellectual Property (IP) rights, as the US implies that Chinese companies are responsible for IP theft. The trade dispute has led to tariffs and barriers, which hurt global trade and economic growth.
Another worry for investors is the effort of the UK and the EU to get to a transition deal for the UK leaving the bloc. The UK prime minister has been unable to get the proposed deal through UK parliament, which has caused multiple extensions and a change of prime minister from Theresa May to Boris Johnson. Eventually this led to new elections. The conservative party has won a majority in the election, which should enable the government to pass the deal through parliament. However, this will be the kick-off for the negotiation on the future trade relation between the EU and the UK, which will cause new rounds of uncertainty.
Any negative headline in both these sagas have worried investors and generated short-term volatility across financial markets.
Global economic growth backdrop remains moderate
The underlying economic data remains moderate. In the US economic growth still looks healthy. Europe, however, has been hit by global trade worries and Brexit uncertainty. The manufacturing sector suffered particularly from the headwinds and this was followed by an economic slowdown across the core European countries. Germany was only just able to avoid a technical recession, posting economic growth numbers of -0.1% in Q2 and +0.1% in Q3. Across Asia we also saw weakness induced by weaker trade and uncertainty, with Chinese year-on-year growth trending lower to 6.0%.
Despite the moderate economic growth picture and the geopolitical worries the supportive monetary policy managed to drive asset prices higher. Most fixed income investments generated decent returns as interest rates and credit spreads decreased across the globe. Risky assets, like equities and listed real estate, are on their way to post their highest annual returns in a decade.