BlackRock highlighted three key events it thinks are important for markets this quarter in a recent commentary from global chief investment strategist Richard Turnill.
According to Turnill, uncertainty around key events is likely to stoke volatility, arguing for greater portfolio resilience in 2019.
“We prefer a barbell approach: exposures to government debt as a portfolio buffer on one side and allocations to assets offering attractive risk/return prospects such as quality and [emerging market] stocks on the other.”
Here are the three key events to watch in the first quarter:
Jan. 29-30: FOMC Meeting
The Federal Open Market Committee’s Jan. 29-30 meeting will be a key event in the first quarter, as the U.S. economy nears late cycle and financial conditions tighten, according to Turnill.
“Both Fed policymakers and the markets will be laser-focused on economic data for clues about the health of the global economy,” he writes.
Turnill expects the Fed to become more cautious as U.S. interest rates approach neutral — the level at which monetary policy neither stimulates nor restricts growth.
According to Turnill, the Fed reiterated its tightening bias in December, citing a still robust growth backdrop.
The policymakers’ median rate expectations for 2019 dropped to two hikes from three, which is in line with Blackrock’s base case.
Turnill thinks the January meeting could provide clues to the Fed’s future path.
“We see a pause in March looking increasingly likely, as the Fed weighs the impact of tightening financial conditions and economic fundamentals,” he writes.
March 1: Potential End to U.S.-China Trade War Truce
A second key date is the potential end of the 90-day trade war truce between the U.S. and China on March 1.
“A lack of clarity as to what was agreed between U.S. President Donald Trump and China’s President Xi Jinping on Dec. 1 highlights the fragility of the truce,” according to Turnill.
He also notes that recent steps taken by China to increase its purchases of U.S. goods, protect intellectual property and further open its economy could lead to an extension of the truce.
Turnill also expects structural tensions related to China’s industrial policy and competition for global technology leadership to persist.
Negotiations between the two sides are set to resume this week.
March 29: Brexit
The third key date is March 29, when the U.K. is scheduled to leave the European Union.
The U.K. needs to agree on a withdrawal deal with the EU to avoid a messy exit. However, according to BlackRock, the odds of the parliament passing Prime Minister Theresa May’s current deal with the EU look “very low” given deep domestic political division.
“A change of path is likely necessary, but we don’t see a clear direction,” Turnill writes. “We still put a low probability on a ‘no-deal’ Brexit, though the valuation of the British pound appears to reflect significant fears of a disruptive exit.”
— Check out Bob Doll’s 10 Predictions for 2019 on ThinkAdvisor.