What happened in Q1? - Nomura

Bilal Hafeez, Research Analyst at Nomura points out that at the start of the year, based on their observations, investors were expecting US yields to surge higher, the Fed to first hike in June, equities to perform well, the dollar to strengthen and continued oil market rises.

Key Quotes

“The first quarter of the year confounded most of these expectations with notable weakness in the dollar, China’s strength and the market easily digesting a more hawkish Fed. The most important lesson was to question one’s assumptions about the relationships between politics, macro and markets.”

“Rates markets – all about swaps

Bond yields rose, but in the Euro area, rather than in the US. Italy and France’s spreads widened on heightened political risk concerns, but even Germany’s yields rose as the Euro-area cyclical recovery took hold. US yields meanwhile barely changed. In swaps space, US yields rose as spreads normalised on hedging flows. Interestingly, EUR, USD and JPY saw the biggest increases in 10y swap yields over the quarter. As for short-term yields, the US led the pack, with commodity countries Australia, NZ and Norway seeing the largest declines.” 

“Dollar confounds

Of all the trades that seemed obvious, dollar strength was one. Moreover, if investors had been forewarned that the Fed was going to hike in March instead of June, then they might have felt even more emboldened. Instead, the dollar was one of the worst-performing currencies over Q1 – only the Turkish lira performed worse (on a spot basis). In G10, the top-performing currencies were the Australian dollar and Japanese yen, while in EM they were the Mexican peso, Russian ruble and Korean won. The Trump factor on EM clearly did not play out as many had expected (i.e., MXN and KRW weakness).”

“Risk markets do well

Most equity markets were up around 5% over the quarter. The top market China, though, was up close to 15%. Investors’ concerns of a slowdown were therefore put to rest. Other Asian markets (e.g., HK, India, Singapore and Korea) also performed well. The worst-performing equity market was Russia, which was likely due to falling oil prices (themselves a surprise to investors). In other commodity markets, base metals performed well, likely on China’s strength. Credit markets generally performed well.”