Central banks were in the spotlight in March, with the European Central Bank (ECB) and the US Federal Reserve (Fed) holding meetings during the month. As German exports showed the worst slump in six years, the ECB pledged more cheap funding for banks and pushed out its expectation for rates hikes from this year to the next and took a knife to the region’s 2019 growth forecast (cutting it to 1.1% from 1.7%). Later in March, the Fed also struck a dovish tone. Since its December meeting, the Fed members have gone from expecting to hike rates twice in 2019 to not expecting any rate hikes this year, while the market is pricing in an 80% chance of an interest rate cut in 2019. The Fed also surprised the market by announcing an earlier-than-expected end to its balance sheet runoff. As central bank action pushed rates lower, Germany’s 10-year bond yields turned negative for the first time since 2016 and the US yield curve inverted as 10-year government bond yields dropped below 3-month government bill yields. The inverted yield curve is normally a reliable leading indicator for recessions and added to the late-month volatility.
Developed market (DM) stocks ended the month higher, comforted by the cautious approach of central banks. The S&P 500 Index was up 1.9% for the month, enough to drive it to its best quarter since 2009 (+13.6%), with most sectors strong apart from banks, where lower rates will challenge profitability. European stocks were also able to eke out gains, particularly high-yielding stocks, which benefitted from a resurgent search for yield.
Emerging markets (EMs) had mixed fortunes in March – China and India were among the strongest markets globally, while Brazilian and Turkish markets slumped. Chinese stimulus continued to flow through to consumers’ margin loan accounts, maintaining momentum in domestic stocks with the Shanghai Composite Index now up 24% for the year. India was the star performer in March, bouncing back from its tough start to the year as tensions with Pakistan eased and polls suggested a likely second term for Prime Minister Narendra Modi in upcoming elections. Vulnerable EM currencies had a tough month – the Argentinian peso was down almost 10% after data showed the country had a fourth quarter of shrinking economic growth, while the Turkish lira declined by over 4%, with an alarming drop in official reserves and clumsy intervention from the central bank increasing fears.