CHART OF THE MONTH
Dissecting the fear-to-fact ratioA case of irrational markets?
It was only mid-November when the US and Australian 10 year government bond yields nudged 3.24% and 2.76%, respectively, and local markets were pricing in no chance of a rate cut from the Reserve Bank of Australia (RBA) and a rate rise in May 2020.
Yet in early January, the Australian 10 year government bond yield rallied down to as low as 2.11%, (only 30 basis points (bps) above the 2016 generational lows of 1.82%) and markets moved to fully price in an easing by August 2020.
Typically, such large moves are driven by a profound negative economic shock which sees risk appetite decline and markets reassess the path of cash rates. Sometimes markets can over-react to a change in state, with negative sentiment feeding on itself and a temporary loss of confidence, or low seasonal market liquidity conditions, compounding moves in asset prices or yields.
So what’s behind the recent rally? Declining fundamentals, poor sentiment, or a mix of both?
There is no doubt that there was a slowing in global and domestic growth over the latter part of 2018, but it appears the market’s adjustment to this was exaggerated by political dramas and a decline in market depth over the Christmas and New Year period.
We see recent volatility leading to offshore central banks delaying any tightening plans, which in turn, will help stabilise sentiment and activity levels. Our view is that the RBA will respond to recent developments by signalling confidence in the domestic outlook and the stabilising role that it can play by leaving the cash rate unchanged at accommodative levels until it sees signs of wages lifting.
Fundamentals point to a delay and watering down of tightening expectations, fully pricing in an easing reflects excessively bearish sentiment that should unwind as economic outcomes are not as dire as expected.
Source: Bloomberg, Janus Henderson Investors. As at 31 December 2018.
This information is issued by Janus Henderson Investors (Australia) Institutional Funds Management Limited (AFSL 444266, ABN 16 165 119 531). The information herein shall not in any way constitute
advice or an invitation to invest. It is solely for information purposes and subject to change without notice. This information does not purport to be a comprehensive statement or description of any markets or securities referred to
within. Any references to individual securities do not constitute a securities recommendation. Past performance is not indicative of future performance. The value of an investment and the income from it can fall as well as rise and you
may not get back the amount originally invested.
Whilst Janus Henderson Investors (Australia) Institutional Funds Management Limited believe that the information is correct at the date of this document, no warranty or representation is given to
this effect and no responsibility can be accepted by Janus Henderson Investors (Australia) Institutional Funds Management Limited to any end users for any action taken on the basis of this information. All opinions and estimates in this
information are subject to change without notice. Janus Henderson Investors (Australia) Institutional Funds Management Limited is not under any obligation to update this information to the extent that it is or becomes out of date or