Global Confidence: Shake, Rattle, Roll?

Mid Week Bond Update

Global Confidence: Shake, Rattle, Roll?

In the current market turmoil, how will the disparity between business and consumer confidence get resolved?

The week’s heightened rhetoric surrounding trade and politics is a reminder that the fears of market participants can quickly overwhelm fundamentals in the short run. That said, wavering confidence can be useful in reframing how we view those fundamentals -- a dynamic that may apply to the current disparity between consumer and business confidence in the world’s major economies, both developed and otherwise.

As in the U.S., consumer confidence in the rest of the developed world (and much of the developing world as well) has surged over the past year or two, reflected in robust retail sales figures.  For example, overall U.S. retail spending for the second quarter of 2019 rose at a 7.5% annualized rate – suggesting that the U.S. consumer is spending confidently.

But confidence among businesses has been trending in the opposite direction, something that has happened only rarely over the past three decades as noted by Brandywine Global’s Jay McIntyre.

A Short Term Mismatch of Confidence

Chart courtesy of Brandywine Global. Sources: OECD, Haver Analytics, as of June 30, 2019.  Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

Of course, this must now be seen through the lens of investors’ changing perceptions of the impact of trade tensions. But causes for general optimism abound as well. Over and above retail sales, employment has been strong and wages show signs of steady growth. Interestingly, optimism among U.S. small businesses also remains relatively high. But that suggests business confidence faces bigger challenges within larger multinationals and trade-focused corporations.

On the rise: Safe Haven: Japanese Yen?

At an intra-day high1 of 105.5 Japanese yen per U.S. dollar, Japan’s currency has yet to scale the heights of 2011-2012, when the European financial crisis drove it to as high as 75.35 per dollar.

But the early August 2019 high was nevertheless a significant upward move (3.5%) from the July 31 2019 intra-day low of 109.3 per dollar, the apparent result of several cross-currents over the intervening five days. The list includes long-unresolved trade grievances between Japan and South Korea, ongoing disagreements between China and the U.S., and growing uncertainty around the resolution of Brexit.

While not all exerting pressure in the same direction, the need for a safe haven for currency traders while trade issues muddy the waters elsewhere could be overwhelming the regional issues facing Japan.  The next question: Will the yen revert if the China-U.S. trade conflict cools down again?

On the slide: U.S. 10-year Treasury Yields

November 8. 2018 saw the yield of the 10-year Treasury hit a multi-year high of 3.237%, and the debate among bond investors was whether whether that yield could rise further, bringing to an end the long bull market in bonds.

On August 5 of 2019, that yield reached 1.6705%, a fall of about 158 basis points. Of that fall, 40 basis points2 took place in the four days between the end of the Fed’s July 31 2019 rate cut meeting and an interim spike in China-U.S. trade and currency tension on August 5 2019.

It’s clear that some of the fall since the Fed meeting was driven by unexpected deterioration in the tone of negotiations between the U.S., and China, including the surprise declaration by the U.S. Treasury Department that China would officially be deemed a “currency manipulator” – a reversal of agreements made during previous U.S. – China negotiation sessions.

At present, it appears that one of the world’s largest and most liquid fixed-income markets is in the grip of a sudden sweep of bearish sentiment about global growth.  But whether the current record yields in this portion of the yield curve can hold over the longer term as the U.S. prepares to issue bonds to support its deficit spending, remains to be seen.

All data Source: Bloomberg as of August 6, 2019 unless otherwise specified.


1 Source: Bloomberg, August 6, 2019, 7:00 AM Japan time

2 Source: Bloomberg, August 5, 2019, 6:00 PM ET


The Organization for Economic Co-operation and Development (OECD) is an international organization that promotes policies to improve the economic and social well-being of people around the world.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

One basis point (bps) equals one one-hundredth of one percentage point.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.



Important Information


All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is approved for distribution in those countries and to those recipients listed below. Note: this material may not be available in all regions listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Qualified Investors in Switzerland:
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.  Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:
In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People's Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC's commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC's commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia and New Zealand:

This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827).  The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.

Yields and dividends represent past performance and there is no guarantee they will continue to be paid.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.