-
""

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?

""

We give you versatility and a choice of services

Barclays Private Bank provides discretionary and advisory investment services, investments to help plan your wealth and for professionals, access to market.

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

This document has been issued by the Investments division at Barclays Private Banking and Overseas Services (“PBOS”) division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates included in this document constitute our judgment as of the date of the document and may be subject to change without notice. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modeling, scenario analysis or back-testing.

Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services, and we do not guarantee the information’s accuracy which may be incomplete or condensed.

This document has been prepared for information purposes only and does not constitute a prospectus, an offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which may be discussed in it.

Any offer or entry into any transaction requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding transaction documents. Any past or simulated past performance including back-testing, modeling or scenario analysis contained herein does not predict and is no indication as to future performance. The value of any investment may also fluctuate as a result of market changes.

Neither Barclays, its affiliates nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation.

This document and the information contained herein may only be distributed and published in jurisdictions in which such distribution and publication is permitted.  You may not distribute this document, in whole or part, without our prior, express written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions.

The contents herein do not constitute investment, legal, tax, accounting or other advice. You should consider your own financial situation, objectives and needs, and conduct your own independent investigation and assessment of the contents of this document, including obtaining investment, legal, tax, accounting and such other advice as you consider necessary or appropriate, before making any investment or other decision.

THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IT IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.