Weekly multi-asset desk views
Weekly review: 1 November 2019
- Earnings season progressed with modest upside surprise in the US and Europe so far
- Further easing from the Federal Reserve
- Data releases out of the US and China provide some signs of stabilisation in manufacturing
- The latest on the ‘phase one’ deal
Market and economic review
It has been a quiet week for markets – equities moved slightly higher, with a noticeable outperformance from the emerging market complex. Global government bond yields generally moved lower, with US Treasuries leading the way. The US dollar weakened versus most currencies, except the Canadian dollar where comments from the Bank of Canada were unexpectedly dovish.
In the UK, Parliament agreed to hold a general election on 12 December, after a ‘flextension’ was agreed by the European Union, extending the deadline for the UK to leave the EU to 31 January 2020.
Earnings season progressed with modest upside surprise in the US and Europe so far
The Q3 earnings season has been a key focus and has provided some support for markets. In the US, with about 70% of the S&P 500 Index having reported, headline earnings-per-share growth is tracking at -2%, providing an upside surprise versus pre-season expectations of -4%. We have been interested in observing share price reaction, where ‘beats’ have been rewarded more than ‘misses’ have been punished. This may reflect expectations having been revised down too far ahead of results and the market adopting a more ‘pro-risk’ mind-set. Within the market, earnings have reflected the bigger macro themes: companies more exposed to the consumer/domestic economy have delivered better growth than those more exposed to manufacturing/export markets. That said, more economically sensitive companies have tended to have the best price reaction to results; perhaps reflecting markets adopting a slightly more optimistic outlook for global growth and trade negotiations.
Further easing from the Federal Reserve
The Federal Open Market Committee (FOMC) meeting was held on Wednesday, where they announced a cut to their target range by 0.25%, to 1.50 - 1.75%. This was almost fully priced in by market participants, whose focus was more tuned to the subsequent comments from Federal Reserve Chairman Jerome Powell. There was a clear steer that the central bank wants to hold steady at this range for a period of time, and that there is a need for material depreciation in the economic environment before further policy easing.
Mixed economic data supports our view that the economic slowdown is stabilising
A lot of data was released this week, but we will concentrate on the most salient prints. The official China purchasing managers’ index (PMI) number was a slight disappointment relative to expectations. Manufacturing printed at 49.3, versus a previous 49.8, and non-manufacturing printed at 52.8, versus 53.7. While the official PMI tends to capture trends in larger state-owned enterprises, the Caixin survey focuses more on privately owned and export-facing enterprises – the manufacturing component of this survey rose to 51.7 from 51.4, and within that new export orders moved back above 50 – so a more constructive outlook.
The Q3 GDP reading of 1.9% year-on-year was slightly lower than the previous print of 2%, but notably above the expected 1.6%. On Friday, we received payrolls, the ISM and GDP numbers from the US. The change in nonfarm payrolls beat expectations, printing at 128,000 versus 85,000. We note payrolls have recently been depressed by the strike action by General Motors workers, which ended last week after a 40-day walkout. The ISM manufacturing survey was marginally disappointing with a 48.3 print versus an expected 48.9, but it was still above the previous print of 47.8 and the new orders component improved to 49.1 (previous 47.3).
Taken together, these releases provide some signs that manufacturing activity may be stabilising in the US and China.
The latest on the ‘phase one’ deal
There have been various contradictory news stories on the US-China trade front, specifically around the signing of the ‘phase one’ deal which we have discussed in previous weekly updates. To summarise what we know, this deal entails a commitment from China to purchase US agricultural products and reform their intellectual property protections and financial market openness.
There was an expectation that the deal would be signed at the 2019 Asia-Pacific Economic Cooperation Summit in Chile, set for later this month. However, due to domestic troubles, Chile announced the cancellation of the summit. A spokesman for the White House said the time frame for a deal is still the same despite the cancellation, so we just await news of a venue.
Next week is relatively quiet on the data front. In the US, the non-manufacturing ISM is the real focal point. In Europe, we will see final PMIs and will also receive trade data out of China.
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