6 to 12 March: A Change in the Wind

Over the past 6 months equity markets have benefited from the tailwinds of a strong rebound in the global economy and continued monetary stimulus. This week’s events confirm that the second order consequences of a better macro picture are building. In particular, the monetary impulse may be turning negative:

• The FED is extremely likely to raise rates on Wednesday.
• We think the ECB will start adjusting its forward guidance in June (post French elections).
• Most economists expect the BOJ (meeting on Thursday) will cut bond purchase targets or raise its 10-year yield by the end of the year (and there are reports it has already started buying an annualised 18% fewer bonds than targeted).
• China also has a tightening bias.

This leaves Brazil as the only major central bank still in a credible rate cutting cycle. The Bank of England also meets this week.

Of course the outlook is not set in stone. After US crude inventories rose by 8.2 million barrels (9th consecutive weekly gain), oil saw its biggest one-day drop in 13 months and touched a 3-month low. The recent surge in headline inflation could therefore reverse. There is also political risk. This week sees Dutch elections, which are expected to pass without major event.

In India, Prime Minister Narendra Modi claimed a landslide state election victory in Uttar Pradesh, steamrollering the opposition and generating a wave of support that already makes a victory in the 2019 general election look a very likely outcome. Indian markets are expected to perform strongly on Tuesday (closed for holiday today).

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