DBS Monthly : Living with volatility
- FX: Multiple event risks in September. Brace for more volatility
- Rates: Demand for safety amidst a highly uncertain outlook will keep G3 yields lower for longer
- Credit: Despite a challenging growth backdrop, the Asian credit market continues to expand
- Equities: Consider high yielding Singapore REITs as bond alternatives
With the passing of a torrid summer, will September bring some respite? After a rather quiet first half, VIX and FX volatility jumped in July/August and the markets displayed strong flight to safety concerns, with bonds and gold soaring, and stocks (among asset classes) and emerging markets (among geographies) experiencing considerable selloffs.
There are two major narratives at play. First, independent of trade wars (which have been instrumental in hurting investment sentiments worldwide), there are powerful drags to the global economy at play, with China slowing down, and electronics and auto sectors undergoing deep cyclical adjustments. A scenario that sees China and the US signing some sort of a trade deal would still leave these drags to the global economy in place.
Second, the spillover from slowdown in China and EU, and the unrest in financial markets, has had very little impact on US retail sales, housing, wages, and employment. Delays in tariffs on electronics imports, sizeable decline in long term interest rates, and S&P500 still up by 16% since end-2018, are still likely to keep the US on pace for comfortable 2%+ growth the rest of this year, in our view. Indeed, with the Fed poised to accommodate further and no fiscal uncetainty through 2020 owing to the recent debt celining agreement, US growth momentum in early next year looks likely to be robust as well, regardless of what the inverted yield curve seems to be indicating.
This contrast between the US holding up while the rest of the world continues to weaken is going to be problematic for the markets. Asset markets will be pulled in both directions as conflicting growth data and charged political rhetoric persist, ensuring heightened volatility.
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