United Kingdom
The correlation of equity and government bonds reaches new highs
Christopher Broadley, Portfolio Manager at Insight Investment, said: “This week’s chart looks at the changing correlation between US equity and government bonds. The long period of negative correlation (the ideal relationship for 60/40 investors) that began in the early 2000’s and lasted until the post-covid inflation surge is now firmly in the rearview mirror. On both a one- and three-year view, the equity-bond correlation continues to rise, supported by above target inflation. This reduces the benefit that government bonds offer to multi asset investors in terms of the amount of diversification they offer. This challenge highlights the advantage of portfolios that diversify across a wider spectrum of asset classes.†”
Source: Bloomberg and Insight, as at 26 June 2024. Correlations shown between the S&P 500 Index and ICE US Treasury 7-10 Year TR Index.
A soft landing still likely but risks lie in both directions
Kristin Qi, Portfolio Analyst at Insight Investment, said: “Since its peak, US inflation has proved stickier than expected, in part due to the resilience of US economic activity. A continued moderation in growth is likely to be necessary for the Fed to return inflation to target on a sustained basis. With recent economic growth data consistently surprising to the downside, a soft landing still appears achievable. The question is whether the Fed can ease policy with sufficient precision to keep the economy from slipping into recession, but with growth sufficiently modest to keep inflation subdued and on a more predicable trend. June’s below consensus CPI print keeps the dream alive, and that continues to underpin risk assets.†”
Source: Insight Investment, Bloomberg. As at 19 June 2024.
2024: A pivotal year for elections
Shantanu Tandon, Portfolio Manager at Insight Investment, said: “2024 is set be a pivotal year for elections with over 60 countries and regions covering more than 4 billion people scheduled to hold elections. European Union elections have seen a swing towards right wing parties. France has been added to the list, announcing surprise parliamentary elections to be held over June and July. This has contributed to additional volatility in European equity markets but there has been limited spillover to other regions for now. We retain our procyclical outlook for now as the macro backdrop remains broadly supportive.†”
Source: Bloomberg, IMF. As at 11 June 2024. Chart shows elections held or expected in 2024 with select countries and regions highlighted.
Is it time for the ECB to begin cutting rates?
Steve Waddington, Co-Deputy Head of Multi-Asset Strategy at Insight Investment, said: “Investors are currently pricing a 98% likelihood of the ECB cutting rates by 25 basis points at their meeting on Thursday. This would mark the end of the most aggressive hiking cycle in the ECB’s history, and its first cut since 2019. With headline CPI decelerating from a double-digit rate to 2.6% at the end of May, we believe a gradual easing in policy should act to support risk assets over the rest of 2024. Given this view we continue to maintain a procyclical investment position with an equity weighting above our long-term average levels.†”
