Last year's wild market fluctuations seem a distant memory, but volatility has once again reared its head in Turkey, and low inflation presents renewed cause for concern across the developed world.
Europe heads for Japan-style scenario
It was never meant to happen in the first place. And it was certainly not meant to happen a second time. But it did: German 10-year rates fell into negative territory in March.
The cocktail of factors was powerful: continuously weaker activity across the continent, the ECB revising growth and inflation projections lower ahead of lower-than-expected inflation data, a surprisingly dovish Federal Reserve pushing global rates lower, and talks of the ECB tiering bank deposits to mitigate the impact of negative short-term rates on profitability - perceived as a sign the ECB has given up on the prospect of raising rates.
In this context, the flattening of the euro-area curve, measuring the difference between long-term and short-term rates, does not seem odd, especially as medium-term inflation expectations have also fallen back towards 2016 lows. Europe's 'Japanisation' is underway.
Germany sees light at the end of the tunnel
After six months of continuous decline, the German Ifo Business Climate Index recovered in March. Despite consensus, which expected the data to remain unchanged, and weak flash PMI figures, the Index increased from 98.7 to 99.6. The main driver was an increase in business expectations, which gained 1.6pts to reach 95.6. This suggests the German economy could stabilise in the second half of the year.
In term of sectors, services displayed a strong recovery - up 4.7pts - while manufacturing remained a drag - down 2.5pts. This weak data echoes the manufacturing PMI, which reached its lowest level since 2012 at 44.7. While these surveys indicate a negative trend is still at play in the manufacturing sector, encouraging data on the domestic front - suggested by the Ifo - could offer some brighter perspectives for the second half of the year.
Norway sparks central bank envy
In a world of poor economic growth, anaemic inflation and low rates for longer, Norway stands out among major developed economies. On 21 March, Norges Bank hiked its key policy rate by 25bps to 1%.
The Norwegian economy is growing at a solid pace, up 0.9% in Q4 and with an increase of 2.7% expected this year. Meanwhile, the PMI has remained above 55 since last August and inflation has been higher than expected - at 3% and 2.6% for headline and core inflation, respectively, in February, compared to a 2% target.
As a result, Governor Olsen noted: "The outlook and the balance of risks suggest that the policy rate will most likely be increased further in the course of the next half-year." Norges Bank is facing issues other major central banks would currently dream of.
Growth stocks continue to outshine
The Philadelphia Stock Exchange Semiconductor Index (SOX) tracks the performance of thirty companies involved in the design, distribution, manufacture and sale of semiconductors. In the first quarter, the Index rallied 21.4%, outperforming the Nasdaq by 4.6%.
Q4 2018 was very weak for semiconductors, mainly due to weaker-than-expected demand for chips. But since the beginning of this year, the main industry actors have called a trough around Q2 and are expecting a strong rebound in the demand for semiconductors in the second half of the year. Moreover, since the Federal Reserve initiated its monetary policy U-turn in January, and as US-China trade tensions seem to stabilise, the technology sector (i.e. growth stocks) ranks as one of the best performers so far in 2019.
Recently, the SOX reached new all-time highs and recovered the sharp loss of last year's fourth quarter, where it was down 15%. As Q1 earnings season heats up, it will be interesting to see whether the tone remains positive for the second half of the year. Any sign of doubt and we could see a correction on some names.
Turmoil returns to Turkish assets
In March, the Turkish overnight forward implied yield soared by more than 700% - reaching 1300% - due to the fact domestic banks stopped lending lira in the offshore market. Following a heavy plunge in the lira, which lost 5% in one day, it appears Turkish officials tried to stabilise the currency ahead of municipal elections by preventing investors from shorting it. This resulted in squeezing some foreign banks that were unable to close out their FX swap positions.
The overnight rate returned close to normal levels in the following days. However, this event once again damaged investor confidence in Turkish assets and might affect liquidity of the offshore market going forward. Investor concerns were for example reflected in the surge of Turkey's CDS, which increased by 134bps over the month.
Adrien Pichoud, chief economist and head of multi-asset at SYZ Asset Management