Weekly multi-asset desk views
Weekly review: 11 January 2019
- The year began with fears of a growth slowdown once again in focus, driven by decelerating manufacturing data and the impact from trade conflicts.
- Despite initial risk-off tones, with equity markets down sharply and yields rallying, sentiment improved globally. Equity markets moved higher this week and credit spreads tightened aggressively, but government bond yields remained stable.
- The portfolio continues to be positioned for a choppy, range-bound environment. We continue to add new positions in our total return strategies component, when we see attractive opportunities, while our equity weighting remains relatively low.
Market and economic review
Recovery from a weak start
The first trading days of the year started the way they ended 2018: volatile. The initial risk-off tone, sparked by weak Chinese and European manufacturing data, was reversed when the Federal Reserve (Fed) chairman stressed more flexibility in the Fed’s approach to monetary policy and a new round of talks on a potential trade deal between the US and China kicked off.
Risk assets recovered from early softness, with solid gains this week helping to retrace some of the December weakness. Global equities are up between 3% and 6% year-to-date. High-yield credit spreads tightened sharply, partly supported by oil, which rose back above $50 (WTI). Meanwhile, the dollar continued to weaken and the environment has become slightly more supportive for emerging market assets across the board.
Global growth data continues to weaken
Indicators on global growth remain a key determinant for our asset allocation. This week saw a range of key growth data released. The Chinese manufacturing PMI is of particular importance given heightened sensitivity from markets to any evidence of continued slowdown in Chinese demand. There can be little comfort taken then from December’s data, with the Caixin manufacturing PMI at its lowest since 2016 (49.7) and showing a continued deceleration. Apple proved to be a perfect example of this slowdown, downgrading its revenue guidance for the first time since 2002 on the back of weaker iPhone demand in China.
In the US, the ISM Manufacturing Index dropped sharply to 54.1, from a very elevated 59.3 in November – well below the consensus of 57.5. US growth has remained resilient throughout 2018, despite moderation in the rest of the world. However, there is growing evidence that President Trump’s approach to trade conflict, coupled with China’s underlying slowdown, is starting to bite, causing damage in both countries.
There was more positive data on the labour front as December payrolls rocketed by 312,000, far above the consensus expectation of 184,000. While a strong number was expected following distortions of recent months, it was not forecast to increase by that extent.
In Europe, datasets paint a picture of sluggish growth conditions. The PMI numbers continue to signal that GDP growth is decelerating. The eurozone manufacturing PMI fell further to 51.4. France joined Italy in contractionary territory, but this can primarily be attributed to a severe hit to economic activity from the popular protests in late Q4, which could rebound next month. On the services front, the German and French PMIs came in weaker than expected. In Germany and France, industrial production also missed expectations by quite a margin.
Policy: a more flexible Fed, an accommodative PBoC
In December, in a press conference following the fourth rate hike of the year, Fed Chairman Jerome Powell appeared to be ignoring market signals for slowing growth and threats, such as the US-China trade war. This led to a volatile end of 2018.
Since then the stance has changed. Chairman Powell, in a speech last Friday, stressed the central bank would take a “patient” approach to monetary policy, suggesting they could pause rate hikes in March. This was confirmed in the minutes from the Federal Open Market Committee (FOMC) December meeting, which were released mid-week, where many participants expressed the view that the extent and timing of more moves was less clear.
Inflation data out of China was soft, with December CPI and PPI both below estimates, increasing fears about the extent of the slowdown and sharpening the focus on easing by the People’s Bank of China (PBoC). In an effort to bolster the economy, the PBoC further cut the reserve requirement ratio. Further fiscal support has also been flagged.
Earlier this week, trade negotiations resumed as officials from the US and China met in Beijing to discuss ways to implement and enforce a deal before 2 March 2019. Initially planned for 48 hours with mid-ranking officials, the talks were extended to a third day and Vice Premier Liu He unexpectedly attended the discussions with the US Commerce Secretary. This was perceived as a signal that China is attaching greater importance to the talks. Treasury Secretary Mnuchin confirmed Vice Premier Liu will visit Washington DC at the end of the month, adding to the optimism that some sort of deal may be reached.
Watch for the start of the corporate earnings season and the Brexit vote
Next week, the focus will be on corporate earnings, particularly from financials, as the first major companies will start reporting Q4 results and guidance. The estimate for earnings-per-share growth for Q4 currently stands at 12%, which is a substantial deceleration from 27% in Q3.
On the political front, Tuesday’s UK Parliament vote on the Brexit Withdrawal Agreement will be closely watched. Of course, President Trump is never far from the headlines and the partial government shutdown still awaits resolution.
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