With China still out celebrating the new year, other Asian markets have reopened to a massive hangover. 2016 is the Year of the Red Monkey, we hope that is not a reflection of the markets going forward, although it has been a colour the equity markets have gotten used to in a flight-to-safety February. The red signifies fire, which in turn assumes spark and brilliance, while the monkey is clever and energetic; let’s hope this cheeky monkey does indeed bring some much needed brilliance to markets this year.
As the firm risk-off tone continues the Japanese yen has continued its upward assault against the dollar gaining almost 5% so far this week and key benchmark yields have fallen further into negative territory. Just to give you a flavour for how negative sentiment has turned; UK gilts are trading at record-lows having traded below 1.27% today, while European benchmark yields have headed further south into negative territory and the UST 2-10yr yield curve is currently the flattest in 8 years. The 10yr is currently trading within 100bps above the 2yr; the flattening UST yield curve, which we have seen in recent years, is one of the most important gauges of predicting economic downturns.
Although she sounded slightly more dovish yesterday, Yellen seemed to brush off concerns of a US recession, consequently telling Congress that she does not expect the FOMC will soon be faced with a situation where it will be “necessary to cut rates”. In fact she has left the door to raising rates this year wide open. The market disagrees, with most market makers suggesting the Fed will soon be following in the negative-interest-rate footsteps of the BoJ and ECB. One has to assume that her language cannot be altered dramatically as the already knee-jerk markets do not need any more encouragement.
It’s not all doom and gloom however, we have seen a number of participants flood back into the high quality issues we own; with holdings in China and Hong Kong continuing to outperform.