The US Federal Reserve will stay on hold through 2020, belying bond market expectations of another rate cut, Capital Economics said in its outlook for next year.

It expects the Bank of England and the People’s Bank of China to ease policy further, a move which it says the bond market has failed to factor in fully.

Government bond yields have fallen a long way in 2019 with the US Treasury 10-year yield within touching distance of its all-time low in early September, and new lows for bond yields struck in several other economies.

“Although we don’t expect yields to return to those levels, we think that, with policy settings likely to remain loose for a long time and few signs of a surge in inflation, the 10-year yield will stay around 2% in the US, and fall back a bit in core Europe as the ECB eases policy further,” it said in a report.

The stellar rise in equity markets have been largely on account of the loose policy setting in 2019, rather than any change in corporate fundamentals. Earnings growth, which has been weak and in aggregate has fallen globally, will recover only gradually, implying that stocks will post modest returns in 2020.

But it expects UK equities to outperform as the large valuation gap relative to other developed markets that has opened up since 2016 begins to close.

“In emerging markets, we think that equities in India will continue to outperform as growth there picks up, but that equities in China and the rest of Asia will struggle,” it said.

The US dollar does not seem to be overvalued and it expects the currency to continue strengthening as the world’s biggest economy will continue to outperform the rest of the developed market, allowing the US Federal Reserve to stay on hold.

It expects the British pound to buck the strong dollar trend but its gains would be capped by a no-deal-like Brexit at the end of the current transition period in December 2020.