Cash & Liquidity Management

From risk-off to risk-on

Published: May 2019
J.P. Morgan Asset Management Thought for the Month – building stronger liquidity strategies – let's solve it.

May 2019

The market mood has changed dramatically over the last six months. The risk-off sentiment that dominated in late 2018 has very much been replaced by a risk-on attitude in 2019, mainly in response to the recent dovish shift in Federal Reserve policy.

This change in sentiment has been reflected in European markets, where Chinese stimulus measures have also had a positive impact since the start of the year. However, with a weaker trend in economic data and the ongoing uncertainty over Brexit making it difficult to predict the outlook for monetary policy, investors will need to look closely at the data.

Eurozone: A downward spiral?

The European Central Bank’s (ECB’s) decision in March to provide further targeted longer-term refinancing operations (TLTRO) to support the banks came much earlier than the market was forecasting. However, the announcement reflected downward revisions to eurozone growth and inflation expectations. Regional bond yields have slumped, with pricing now suggesting that there will be no ECB interest rate increases for about 18 months.

To see whether the downward trend in eurozone economic data is likely to continue, or whether growth will rebound, investors will need to keep a close eye on several key economic indicators, including:

  • Investment intentions and consumer and business confidence data – Investors will need to monitor how business is responding to the risks of a global slowdown fueled by trade tensions with the US and China.
  • Inflation – ECB president Mario Draghi recently stated that “inflation convergence is delayed and not derailed” when fielding questions on the current growth slowdown. We will be closely monitoring upcoming inflation prints, specifically wage inflation in the quarter.
  • Domestic demand – We are looking at whether the downturn in external demand will spill over to domestic demand. The ECB recognises that risks to the consumer have also increased to the downside.

UK: Brexit means uncertainty

The Bank of England continues to suggest that a gradual – and limited – tightening of monetary policy will be appropriate if the economy develops in line with the projections it set out in February. However, these projections are based on a smooth transition towards a new trading relationship with the European Union. In other words, they are substantially subject to change depending on the chosen Brexit path.

Given the current uncertainty over the outlook for UK interest rates, we are monitoring two main areas of the UK economy for clues to the Bank of England’s thinking:

  • Investment intentions and consumer and business confidence data – Analysis of the latest business surveys will be crucial given risks of a global slowdown fueled by a trade war have increased and the lack of clarity over Brexit.
  • Inflation – Wage inflation needs to be carefully monitored, particularly as any softer outcome to Brexit could boost activity and allow the Monetary Policy Committee to justify tightening of policy.

To find out more about our views on the latest economic and policy developments, please visit

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