German and Japanese bond yields continue their decent into negative territory, with 10-year UST yields falling further below 3 months yield. Simultaneously, one by one, central banks continue to soften their forecast, adding extra pressure on interest rates. The European Central Bank and the Federal Reserve seem to be in direct competition in softening. Until now, Mario Draghi is victorious up to this point, noting in his latest speech that the rate boost could possibly be further postponed. In March, a distinct softening was also exhibited by the Bank of England, the Royal Bank of Australia, and the Royal Bank of New Zealand.
Because of this, one after another, the official currencies of each these nations are dropping under the pressure, which really should assist national markets. However, all Central Banks should pay very attention to the implications of their forecasts. The skeptical tone of central banks is progressively impacting markets. Our point of view is that the extreme caution of such a high level to some degree does not match to actual economic indicators. They are heading downward, but not quite as much as we can speak about an impending economic downturn.
Either way, investors have become increasingly accustom to reduced rates, and the demand for defense-related assets pushes the United State Dollar and Japanese Yen up, while simultaneously being an significant barrier to the advancement of stock indices. The way in which the markets are organized means that if regulators discuss any issues, then there will certainly be problems.
Stock indices tend to not display major dynamics, as was noted at the end of 2018. However, it is worth remembering that during the final quarter there was a demand for correction within the markets following an extended period of growth, but currently the circumstances are different. Even so, the VIX volatility index pulled away from lows hit during mid-March, highlighting expectations of rising volatility.
All of this leaves the question of will central banks manage to break free from the softening pitfall? Most likely, yes. But we must note that they will need some type of beginning point, for example, a trade deal involving China and the U.S. However, it simply cannot be ruled out that the central banks are attempting to resolve the issue of structurally decreased economic growth rates by deteriorating their own currencies. Such a move resembed the, “Beggar-Thy-Neighbor” policy, which at the start of the 20th century is regarded as being the trigger or at least certainly one of the components that impacted the Great Depression.