Expect the bumpy journey to continue
Investors have been buffeted by a large number of negative headlines in 2018. We remain of the view that tightening global liquidity conditions are likely to exacerbate market volatility.
In sum, we see no reason to stray far from our original 2018 outlook: volatility is increasing and markets are being whipsawed by numerous negative headlines. As a result, we suspect investor sentiment will gradually deteriorate throughout the year. Importantly, we expect higher market volatility to weigh on business and investor confidence, influencing the timing of the next economic downturn.
As we highlighted in our year ahead outlook, Figure 1 is the key chart for the year, describing how investors like us would switch from having $300bn of fresh quantitative easing-funded (QE) capital to deploy in 2017 to having to find $700bn to absorb the net government bond issuance in 2018. As well as this one trillion dollar liquidity shift, we also highlighted risks posed by stretched market valuations.
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