Watch the Market Commentary with Alex Bellefleur
The key event in Q1 was the US Fed policy change. Chief Economist & Strategist Alex Bellefleur shares what it may mean for the markets.
ALEX BELLEFLEUR: The most important event to have taken place in the markets is the change in tune from the Federal Reserve in the first quarter. At a roundtable event on January 4th, Fed Chair Jerome Powell adopted a much more accommodative stance when it comes to the likelihood of future interest rate increases.
In fact, it led to considerably different pricing in the bond market with interest rate cuts now expected, and this also led to a much more optimistic equity market which now believes that the risk of a policy error from the Federal Reserve is much lower.
In turn, this led to much-improved performance from all asset classes in the first quarter.
For the past year or so, our team has adopted a position on the euro, the currency, which is different from what the consensus has generally believed. Many economists and strategists have adopted a more optimistic view on the likelihood of a recovery in Europe and on the European Central Bank's ability to normalize interest rates going forward. We, on the other hand, have taken a much more pessimistic view on these issues, as we in fact don't believe that the ECB will be able to normalize interest rates in the current cycle, and as such, we hold an underweight position on the euro relative to the broad basket of currencies.
One of the largest risks to the markets at the moment resides in the execution of the trade deal between the United States and China. The markets widely expect this trade deal to be resolved sometime in the month of May, and I think it's fair to say that with the equity market rallies that we've seen so far this year, a deal is now widely expected by markets.
At the same time, we note that Chinese policymakers have begun to provide targeted stimulus to the Chinese economy, allowing the Chinese economy to bottom out. This may embolden China to adopt a slightly tougher stance in negotiating with President Trump's trade representatives. So, this is a risk that is worth watching by all market participants.