Three market concerns move to the fore

Weekly Market Compass: Exploring the potential for populism, protectionism and pressure on debtors

Time to read: 4 min
Last week brought renewed focus to three areas of concern that I’ve been writing about for some time: populism, protectionism and pressure on debtors. It appears that we may be moving closer to certain outcomes that could be of concern to markets.

Populism

On March 4, Italian citizens will vote in the country’s parliamentary elections. With polls showing there are still many undecided voters, there is much uncertainty surrounding the election. It seems likely that the Five Star Movement — a relatively new party focused on environmental, anti-immigration and Euroskeptic issues — could garner the most votes of any party, although not enough to govern without a coalition. However,

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Markets face another inflation surprise

January inflation comes in higher than expected. What will it mean for markets and the Fed?

James OngTime to read: 2 min

The Feb. 14 inflation report showed that prices rose more than expected in January, which could raise market concerns over future Federal Reserve (Fed) policy and lead to continued market volatility. The consumer price index (CPI) rose 2.1% year-over-year, compared to consensus expectations of 1.9%, while core CPI rose 1.8%, compared to consensus expectations of 1.7%.1

The market’s focus is on core CPI, shown below, since it is the closest data point to the core personal consumption expenditures index (PCE), which is the Fed’s preferred measure of inflation.

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Will cash be king as the Fed hikes rates?

Cash yields have risen along with rates, which may help investors reduce duration risk

Time to read: 3 min

US money market fund balances recently reached their highest level in seven years1 and, according to Crane Data, average money market fund yields crossed the 1% threshold for the first time since November 2008.2 Invesco Global Liquidity believes that more investors may consider cash and conservative fixed income solutions as part of their active asset allocation in the near term for multiple reasons.

Cash yields rise due to Fed rate-hiking cycle

Yields on cash and conservative low duration vehicles have become more attractive since the US Federal Reserve (Fed) began removing monetary policy accommodation and moved away from a near-zero federal funds rate. Since December 2015, this policy shift has driven

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Good news is bad news: Deconstructing the market sell-off

Weekly Market Compass: ‘Animal spirits’ still matter, but a different animal is making noise today

Time to read: 4 min

Stocks globally have experienced more than a week of tumultuous trading, with the US stock market officially in correction territory. And after being relatively sedate for years, the VIX Index has risen dramatically in recent days, indicating rising volatility. Stocks have moved so far so fast that investors have experienced financial whiplash and are trying to understand what caused markets to change course so abruptly. To put it simply, almost everything that should be a positive for stocks is now a negative for stocks. Consider:

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Interest rate outlook: Above-trend growth could cause US inflation later in 2018

Invesco Fixed Income shares its views on rates around the world

Time to read: 4 min

US:

We expect US interest rates to be range-bound in the first half of 2018, but with a risk of higher yields in the second half. Our rates view is driven by our analysis of growth, inflation and monetary policy in the US and globally. Our models estimate that US growth approached a near cycle high at just above 3% in the fourth quarter of 2017. Growth should remain strongly above trend at 2.75%3 in 2018.

Inflation is likely to remain low for the first half of this year. Headwinds facing the housing and auto markets could

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Currency outlook: Possible global central bank policy surprises could suppress US dollar

Invesco Fixed Income shares its views on currencies around the world

Time to read: 2 min

US dollar:

We expect the US dollar to weaken throughout 2018. We base our view on positive global growth and predicted changes in global monetary policy. While we believe US growth will maintain its strengthening trend, growth across the developed world (especially in Europe and Japan) is likely to be even stronger. Global central banks, especially the European Central Bank (ECB) and the Bank of Japan (BOJ), are likely to tighten policy in response. We believe market expectations of policy tightening are currently much lower for the ECB and the BOJ compared to the Federal Reserve, which means there is more room for a market surprise that could cause their currencies to rise against the US dollar. In addition, strong global growth environments have historically led to a weaker US dollar, as US investors seek higher risk premia abroad and non-US investors stay home. We do not believe corporate repatriation flows will be a large driver of US dollar price action. Foreign profits are already largely held in dollar-denominated assets, and repatriation is likely to occur over many years.

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What do inventories tell us about the economy?

Declining inventories and rising industrial production may create a strong backdrop for value and momentum strategies

Nick KalivasTime to read: 3 min

One benefit of factor investing lies in the cyclical nature of factors. Because various factors tend to perform differently depending on economic conditions, investors can harness these attributes to their advantage.

For example, value and momentum stocks have often been better-suited for periods of expansion. This is because value strategies tend to invest in cyclical stocks that may benefit from faster economic growth, while momentum strategies operate under the premise that stocks with strong recent performance may continue to outperform over the near term.

It’s my view that the current inventory cycle provides a favorable backdrop for equity prices and makes a compelling case for

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What does market volatility mean for fixed income?

As inflation fears roil the markets, we share our outlook for global bond markets

Time to read: 4 min

Market expectations of inflation have risen in recent days, after signs of wage growth — often seen as a harbinger of inflation — appeared in the January jobs report. We at Invesco Fixed Income believe investor concerns that inflation is finally showing signs of life have helped drive interest rates higher and impacted credit markets, where worries over higher interest rates (and their potential impact on companies) have caused declines in stock markets and other risky assets.1

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What’s the outlook for Asian equities?

Earnings expectations dim across the region, while China’s reforms remain a bright spot

Time to read: 4 min

The synchronized global recovery is being felt across Asia, but the level of opportunity varies by region. Below, I discuss the macro environment as well as the Earnings, Quality and Valuation (EQV) statistics that influence my team’s bottom-up stock-picking decisions.

Japan: Earnings are a bright spot, but quality is lacking

The Japanese stock market reached a new 25-year high in 2017, and the Nikkei 225 Index posted a 10% return in the fourth quarter.1 However, even with a 22% full-year return for the index, Japan was the weakest international region in 2017,1 and it’s the largest underweight of Invesco International Growth Fund.

On the bright side:

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US Treasuries contend with debt ceiling déjà vu

Extraordinary funding measures are running out, and concerns are evident in Treasury yields

Time to read: 2 min

The so-called “extraordinary measures” that are currently being used to fund the US government are projected to run out in early March. With this “drop-dead” date quickly approaching, it appears that the Treasury bill market is already reacting to the potential disruption. Below I answer some frequently asked questions about the debt ceiling, extraordinary measures and the impact on Treasury markets.

When is the government likely to run out of funds?

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