Market Analysis Jan 2020

In January, US equities initially surged in the first half of the month, propelling the S&P 500 to a record high. Trade tensions eased with the anticipated signing of the phase one US-China trade deal. Favorable economic data showed unemployment at a 50-year low of 3.5%, while controlled inflation allowed the Federal Reserve to maintain its monetary policy. However, mounting concerns about the coronavirus spread led to the market's early gains eroding in the second half of the month. Energy stocks suffered significant losses, and oil prices declined due to anticipated lower Chinese demand.

The Eurozone began the year with weak equity performance due to concerns over the coronavirus's global economic impact. Key sectors like energy, materials, and consumer discretionary faced considerable weakness. However, the utilities sector proved resilient due to its low-risk nature during uncertain times. Economic data showed mixed results, with the flash GDP estimate indicating slow growth and annual inflation slightly rising. The eurozone composite purchasing managers' index (PMI) remained steady at 50.9, reflecting stabilization at low levels.

UK equities experienced a decline, coinciding with the country's formal exit from the EU and entry into a transition period. Sterling exhibited volatility, notably surging after the Bank of England's unexpected decision to keep interest rates unchanged. Despite mixed economic data, indicators suggested a recovery in consumer and business confidence post-election.

In Japan, equity markets faced a 2.1% decline due to extensive media coverage of the coronavirus and escalating tensions with Iran. Consumer confidence improved, but the recovery was restrained compared to previous tax hikes. The reporting season for the October to December period was ongoing, with a clearer picture expected in February. In Asia ex Japan, equities declined as the coronavirus outbreak affected economic growth and sentiment in several countries.

Government bond yields dropped substantially as investors sought safety amid coronavirus concerns. Both the Federal Reserve and the Bank of England kept policy rates unchanged. The US 10-year Treasury yield declined, while Europe's yields followed a similar pattern. Corporate bonds demonstrated positive returns, with investment-grade outperforming government bonds. Emerging market hard currency government and corporate bonds delivered positive total returns, although EM currencies faced declines.

Convertible bonds gained in US dollar terms, with US and European convertibles becoming cheaper, while Asian and Japanese convertibles remained below fair value estimates.