March Equity Market Review

Markets shrug off an inverted yield curve to post further gains but momentum stalls

Apr 2019


  • Equity markets rallied in March to mark the third month in a row of positive returns with the US and Developed Markets outperforming Emerging Markets in a return to a pattern that dominated much of 2018. But investors were spooked in the final week by yields in the US three-month Treasury bill surpassing that of the ten-year bond – otherwise known as an ‘inverted yield curve’. The phenomenon has preceded every US recession since World War II and last happened in 2007.
  • US yields had been converging for some time and the latest pivot lower followed German manufacturing data that showed a contraction and a potential for a further slowdown in Europe. This sent the yield on the 10-year German bond yield into negative territory for the first time since 2016 and sparked the US ten-year bond to drop to 2.41% with the three-month Treasury yielding 2.44%. They did re-invert on the final day of trading but the signal still proved to be a red flag to investors.
  • In a related move, the US Federal Reserve paused on its three-year effort to tighten monetary policy, abandoning its own projections for further interest rate hikes this year amid early indications of a potential economic slowdown. It also said it would end its quantitative tightening programme by September but instead of giving the market a leg up, traders chose to concentrate on the negative comments on the economy, and sent stocks lower on the news.
  • Britain’s ‘torturous’ exit from the EU turned into Britain’s ‘excruciating’ exit from the EU. First the country’s parliament again rejected the deal struck between Brussels and Prime Minister May, before a third reading was abruptly stopped by the parliament’s speaker. PM May then asked for a three-month delay, which was cut short by the EU, before the bill failed for a third time in parliament, with Conservative MPs piling pressure on Mrs May to resign. Meanwhile, more than one million people marched through London asking for a second referendum, while six million signed an online petition to revoke the whole thing.
  • Among other events around the world, a right-wing terrorist killed 50 people in a New Zealand mosque. In the aftermath, the country’s almost-millennial Prime Minister, Jacinda Ardern, took steps to ban semi-automatic weapons. In the US, Special Counsel Robert Mueller submitted his report into Russia’s election interference with the country’s Attorney General saying the report recommended no new charges but neither did it not exonerate the President from obstruction of justice accusations.

Equity Markets

  • Global equity markets were in a subdued mood all month but ended modestly higher with the MSCI World index adding 1.3%. The US was again a slight outperformer with a return of 1.8% while Europe worried over weak economic datapoints and the UK’s difficulties with Brexit to gain just 0.7%, albeit with the UK outperforming as the pound fell. Developed Markets outperformed Emerging Markets, with the latter being held back by another weak month in Latin America, specifically, Brazil.
  • Among the Developed Markets, the US markets were driven by the Fed’s dovish comments which indicated no more rate rises this year but were capped by renewed worries over details of a trade deal with China as well as the strength of the domestic economy with the yield curve inverting. Nevertheless, the domestic S&P 500 delivered a 13.1% return for the quarter, its best in almost ten years. In Europe, the Germany was a notable underperformer after manufacturing data pointed to further weakness ahead for the economy while the rest of the continent failed to counter the 1.4% fall in the MSCI Germany index.
  • Emerging Markets ended higher on aggregate with the MSCI EM index up 0.9% by the end of the month. Weighing on performance was EMEA, down 1.3%, and Latin American, down 2.5%, while the Asia ex Japan index ended 1.7% higher. EMEA lost ground after Turkey fell sharply on a report the country’s forex reserves had deteriorated, causing the lira to fall aggressively. Latin America also fell for the second month in a row as Brazil lost almost 4% as doubts rose on whether President Bolsonaro would be able to pass his pension reform plans. Chile stocks were also notably weaker on lower copper.
  • Asia started the month well to carry forward the momentum from January and February, and posted gains for the first few weeks before contagion from Turkey and Latin America pushed indices lower. However, inevitably, markets were mixed with China ticking higher on the final day of trading on fresh economic stimulus and a sense that the worst was behind it, but Hong Kong underperformed on dovish comments from the Fed on interest rates.
  • Korea was a notable faller losing another 3% to make the market there the weakest among the north-Asia bloc for both March and the first quarter. Malaysia also had a weak month after a gloomy outlook from the central bank while other Asia markets traded a percent or two either side of the flatline for the month. India outperformed to gain over 9% as the country neared its elections with polls indicating the incumbent government would be returned comfortably and tensions with Pakistan eased.

Fixed Income

  • Global bond markets rallied in March as major central banks turned more accommodative amid the rising growth headwinds. Apart from the Fed’s dovish signals, the ECB also announced a fresh round of bank funding and pushed out the first possible date of interest rate hikes to 2020. The looser policy backdrop sent 10-year US Treasury yield lower by 31 bps to 2.41%, the lowest since December 2017, while 10-year German bund yield slipped into negative territory for the first time since 2016.
  • In Asia, domestic interest rates similarly tracked G3 interest rates lower. While central banks in Asia kept policy rates unchanged during the month, expectation of policy easing on the back of the Fed pause grew. Philippine and Indonesian domestic bond markets were among the outperformers while gains were more muted in lower-yielding markets such as Taiwan and Thailand.
  • However gains in the local currency bond markets were offset by weaker Asian currencies: the tug-of-war between slowing growth and the Fed’s pause gave way to a more cautious investor sentiment which weighed on Asian currencies especially in the Philippines and Indonesia.
  • Asian USD-denominated credit markets were also well supported by the fall in US risk-free rates. Further, the resilient demand in yield continued to see credit spreads tightening, particularly in the high yield corporate sector.  Asian high yield corporate sector emerged as an outperformer as a result, while quasi-sovereigns in both investment grade and high yield spaced lagged.


  • Commodity prices rose over the month however in line with the rising equity markets, performance was choppy. Crude oil continued its slow grind higher for most of the month, buoyed by voluntary supply cuts from OPEC producing countries, and as US-led sanctions against Iran and Venezuela continued. But as the month wore on, fears about weaknesses in the global economy began to weigh, and combined with record levels of crude production out of the US, to send prices lower again.
  • Iron ore prices rose slightly after a cyclone hit Australian exporters but the gains were at a slower pace than in January and February after Vale said it had been given permission to restart production from one of its biggest iron ore mines in Brazil following January’s tailings dam collapse. Palladium hit another record high on the risk of a ban on Russian exports added to an already tight supply although was off its peak by the end of the month. Copper reversed last month’s gains on higher inventory levels and economic worries, but losses were capped by China cutting tax on its manufacturers.
  • Aluminium also fell on rising inventories and concerns over a possible developing supply glut. Gold rose steadily through the month after the Fed’s decision to keep interest rates on hold for the rest of the year and uncertainty rose over Brexit but dipped into a small loss on growth concerns on consumer strength in China. LNG prices slumped to three-year lows as the usual winter price peak failed to materialise amid a new supply glut. Spot prices fell to $4.65 per mmBtu, down from around $10.90 last November as new Australian, and increased US, production came onstream.


  • Despite the Fed confirming its dovish stance at its March FOMC meeting, the US dollar gained against most currencies and indeed among G10 currencies, only Japan’s yen posted a gain (of 0.5%). The Swiss franc and Australian dollar also gained slightly while the New Zealand dollar was basically flat despite the central bank’s surprise move toward a more dovish stance at its March meeting. The UK pound (sterling) and euro lost more than 1% with sterling still marred by the cloudy Brexit outlook.
  • The big news in FX space was in emerging markets. Turkey saw the lira sell off significantly fueled by a report that the country’s FX reserves were being depleted just to keep the currency stable (Turkey does not have ample reserves). The sell off caused the Turkish central bank to  suspend one-week repo auctions which led to tighter liquidity. Other announcements led to a spike in overnight and long-term funding costs with the market speculating that Turkish officials were keen to keep the currency stable ahead of the elections on the final day of the month. The lira declined nearly 4% against the dollar over the month. 
  • Other emerging market currencies felt a liquidity squeeze sparked by the Turkish lira sell off. The South African rand and Brazilian real declined 2-3% while Argentina’s peso declined more than 9%. While the economic data in Argentina has been improving, persistent “dollarisation” by locals has led to a sell off in the currency.   
  • In Asia, the star outperformer was the Indian rupee which is now trading well below 70. The recent currency strength was attributed to the incumbent government’s rising approval ratings that now point to an election success, as well as seasonal inflows. Both the Indonesian rupiah and the Philippine peso were the main underperformers against the dollar in Asia, declining nearly 1%. Looking ahead, for the Philippines, the CPI data will be key in providing markets clues into what the central bank will do next with the market currently pricing in about 60bps of cuts over the next 12 months. 


  • US economic data continued to point to a strong economy although there were a handful of disappointments in some macro datapoints while the inverted yield curve dominated headlines. The regular ISM surveys were mixed, with strong growth in the service sector but the manufacturing side continuing to struggle under the weight of Chinese tariffs. Non-farm payrolls were well below expectations for February while the trade deficit widened to a ten-year high in December. In the plus column, Housing Starts rebounded in January, while the Business Activity and New Orders segments of the ISM surveys were very strong.
  • European economic data continued to show signs of weakness. March German manufacturing data shrank for the third month in a row, and at a worryingly fast pace. It led to German 10-year bonds falling to below zero for the first time since 2016. The ECB also cut its growth and inflation outlooks for the year and adopted a more dovish stance, leading the market to push back expectations for a rate increase to 2020. Retail Sales bounced back in January, as did PMI readings, encouraging the bulls to say the eurozone may avoid an all out recession for now. The UK’s Bank of England kept rates on hold amid Brexit uncertainty.
  • Japan’s central bank kept rates on hold at -0.1% but elsewhere data was weak. The core private machinery orders fell 5.4% mom in January and although service sector activity bounced, it failed to offset December’s weak number.
  • China’s economic growth continued to slow. January-February sales rose 8.2% yoy in line with expectations but industrial output rose just 5.3%, missing most estimates. Retail sales declined by 0.3% as auto sales fell again. On the positive side, exports showed signs of bottoming with the seasonally adjusted January and February numbers above Q4.
  • Not all central banks were dovish this month – Norway’s central bank raised rates to 1% and suggested more may come if the oil price continued to rise. Turkey’s lira fell sharply (see above) ahead of local elections at the end of March but the central bank didn’t intervene. India saw Q4 GDP grow by 6.6% in line with expectations but below Q3’s 7%. Korea’s business surveys continued to show weakness with Manufacturing PMI hitting the lowest since July 2015 with output and new Orders particularly flimsy, but manufacturing and exports led a rebound in the business sentiment survey.

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