When good news is bad

02 August 2019

3 minute read

By Gerald Moser, Chief Market Strategist

The “good news is bad” reaction of equities and bonds to macroeconomic data has been all too prevalent so far in 2019. So how soon will it be before risk assets revert to normal and react positively to good news?

Liquidity and growth are two intertwined factors that are vital to the outlook for the economy and prospects for financial assets.

Traditionally, central banks ease monetary conditions during a recession to provide more liquidity. This results in cheap credit and easy access to financing for households and companies and in turn helps the economy to recover.

Liquidity is like a fuel that can be adjusted to control the strength of the growth engine.

As the economy starts to expand, central banks can slowly remove liquidity with an eye to extending the economic cycle for as long as possible. At that stage, it is usually all about mitigating inflation risks and avoiding excesses building up in the economy. That said, liquidity may need to be increased at a later stage of the economic cycle, as is the case currently.

In a nutshell, liquidity is like a fuel that can be adjusted to control the strength of the growth engine.

In financial markets, the relationship between growth, liquidity and assets is not constant. There are usually two different regimes: “good news is good news” and “good news is bad news”.

In the first instance, positive growth is perceived positively by risk assets and negatively by “safe” assets (see chart below). This is the common state of affairs. With strong growth, equities react well while safe assets such as government bonds, gold or the Swiss franc typically underperform. This regime has prevailed for most of the past couple of years.


However, since the start of the year, “good news is bad news” has been in vogue. In this setup, risk assets and safe assets are positively correlated. Whenever economic data starts to improve or surprise positively, not only do safe assets underperform but growth-sensitive assets, such as equities, underperform as well (see chart below).

A good news is bad news regime is typically the situation that happens when the growth environment is weak and markets question the strength of the recovery. Market participants would rather see more liquidity injections to ensure growth does not fall further rather than wager on growth recovering by itself.


Reverting to normal

With central banks easing, or indicating that they will do so soon, the liquidity part of the equation has been taken care of, at least for the time being. But fixed income markets have priced in more easing than is likely. This could weigh on risk assets if only a small rebound in growth is seen in the three months to September, as we expect.

We need a continuous improvement in growth data for risk assets to switch back into the normal “good news is good news” regime. This is unlikely in the next month or two but could happen later in 2019.

We need a continuous improvement in growth data for risk assets to switch back into the normal ‘good news is good news’ regime.


Market Perspectives August 2019

Find out our latest key investment themes. As expectations of more dovish central bank policy grow and early signs of a potential thaw in trade tensions, sentiment has turned for the better. However, with many geopolitical issues on the horizon and several financial markets close to record highs, is it time to de-risk portfolios?


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