Too Far Too Fast? Goldman Wonders If The Risk Rotation Can Last

US equities are perched at record highs and bond yields have risen fairly dramatically over the past month. Part of this is down to optimism around trade and movement on Brexit.

One thing we haven’t seen yet is convincing evidence of a meaningful inflection in the global economy. You’d be inclined to assume that’s coming – or at least you would if you put any faith at all in the power of rate cuts and dovish forward guidance. Monetary policy acts with a lag, and the global dovish pivot began around six months ago.

But has the risk-on rotation moved too fast? Goldman says maybe. “The multi-year-high correlation between the Pound and our Risk appetite indicator suggests that the fading risk of a ‘no-deal’ Brexit has played an important role in supporting the global improvement in investors’ sentiment”, the bank writes, in a note dated Monday evening.


That said, Goldman notes that the weaker dollar (against most currencies since early September) suggests markets “have repriced better global growth, in particular outside the US, likely further supported by relief from a potential US-China trade truce and the light positioning into riskier assets”.

Donald Trump on Monday threw gas on the fire (something he’s particularly adept at), driving the S&P to a record high with nebulous remarks about the trade talks being “probably a lot ahead of schedule”.

Against this backdrop (where optimism is returning even as investors in the US were leaning heavily into “worst case scenario” expressions in late-September/early-October only to be hit with a double-dose of risk-asset positive news), the DAX has performed well. Goldman goes on to note that German equities have been the best-performing among DM stocks thanks to the DAX’s “exposure to trade tensions, global growth, under-positioned sectors/styles (such as Value and Autos) and Brexit risks”. Indeed, equities have moved largely in lock-step with the bank’s risk appetite indicator and now sit above their September highs.


And yet, Goldman worries it might not last. Or at least not in the absence of a convincing upturn in the data.

“A sustained rotation requires an improvement in economic data, in particular from the manufacturing industry”, the bank cautions. “Without follow-through the recent sharp rotation might not last”.

That’s especially true for European stocks, which Goldman remarks have “diverged from fundamentals which remain weak”.

Still, there are signs that the tide may be turning.

In a Monday note, JPMorgan’s Marko Kolanovic reiterated a constructive outlook on cyclicals, value and commodities, based in part on synchronized global easing.


But it’s not just that. Kolanovic also noted that “for the first time since the outbreak of the trade war in 2018, the JPM Quantitative Macro Indicator for Asia turned positive”. Over the last decade and a half, that indicator has moved from negative to positive only three times – the end of the GFC, the close of the European debt crisis and the bounce off the 2015 EM meltdown.

Key data due later this week will shed considerable light on whether things are improving or poised to take another turn lower.


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