Weekly multi-asset desk views

Weekly review: 15 March 2019

Weekly Mag updates

Summary

  • Positive sentiment in risk assets buoyed by data that suggests US growth remains resilient.
  • Government bonds continue to perform well as inflationary data remains soft.
  • Critical juncture in the ongoing Brexit negotiations as the UK parliament votes for an extension to the current deadline.

Market and economic review

Risk assets witnessed a steady rally this week led by US equities on the back of positive economic data (details below). The positive risk tone helped drive a broad move higher in equities. Government bond yields continued to edge lower as the inflation data remains soft. The positive risk tone prevailed across different asset classes including emerging market debt and high yield debt. A parliamentary consensus to rule out a “no-deal” Brexit resulted in a strong rally in the British pound, which gained 1.8% versus the US dollar to reach its highest level since June. In the commodities space, oil gained 4% after US data showed another larger-than-expected drawdown in crude inventories.

US data remains resilient as green shoot signs emerge in other economies

After a dismal reading in December, US retail sales rose 0.2% month-on-month in January, slightly above expectations. Although the previous two readings were revised downwards, the improving trend resulted in a positive price reaction from the US equities. Further data releases this week reinforced the positive sentiment in US fundamentals including the January durable goods orders data (0.8% month-on-month rise).The core CPI release on Wednesday was softer than expected (0.1% versus 0.2%) and should not raise any warning signals for the US Federal Reserve (Fed).

Away from the US, the economic data released painted a slightly different picture. Chinese data released this week presented a mixed bag for the economy. Industrial output continues to moderate (5.3% year-on-year versus 5.6% consensus) while the unemployment rate rose another leg higher at 5.3%. Year-to-date retail sales came in line with expectations (at 8.2% year-on-year). The trend, however, is worrying as this is the slowest pace of growth since 2009. In response to the recent weakness in economic data, China announced a series of measures including changes in VAT and reserve ratio requirements. This helped the risk tone in Asia with the Chinese markets closing the week with a 1.3% gain on Friday.

Industrial production for eurozone released this week beat expectations (1.4% vs 1%), suggesting a possible Q1 rebound might be in progress. Looking at individual countries, industrial production rose in France, Italy and Spain while it slipped in Germany. The headline inflation in the eurozone increased to 1.5% year-on-year in February from its previous reading of 1.4%. This still remains below the threshold for the European Central Bank to change their current policy.

Critical week for Brexit negotiations as Parliament rules out a no-deal exit

With three major parliamentary votes, this week promised a lot of action on the Brexit debate. The first vote on Tuesday saw Prime Minister May’s amended withdrawal agreement voted down by a margin of 149 votes. On Wednesday, the parliament rejected a possibility of leaving the EU without a deal under any circumstances. The final event of the week saw the House of Commons vote in favour of an extension to the current Brexit deadline. In response, the EU officials indicated an appetite for a possible extension to Article 50 but emphasized the need for a credible justification for this extension from the UK. The duration and possibility of this extension remain uncertain as it would require a unanimous approval by all the constituent EU members.

The market reaction seems reminiscent of previous events which favoured odds of a softer Brexit. Sterling had a volatile week and is now trading at a two year high level against the euro.

The probability of a ‘no-deal’ exit (implied from betting odds) by 29 March, which was around 31% in mid-February, has now fallen to 15%. This leaves an array of possible outcomes on the table, including (but not limited to) a second referendum (at a current probability of 30%), general election before Brexit (50% probability) or a meaningful extension to article 50.

Outlook

Brexit will remain very much in focus next week as Prime Minister May plans to put her deal for a third round of parliamentary voting on Tuesday ahead of the European summit on Thursday. The situation, however, remains incredibly fluid and much will depend on the outcome of Tuesday’s vote.

Recent headlines on the US-China trade talks indicate that the Trump-Xi meeting is likely to be pushed back to April. Any further developments on this front are likely to impact the risk sentiment.

Outside of politics, the US central bank meeting next week will garner attention. Although no policy change is expected, investors will watch out for any change in policy language as well as signals about the timeline for ending the Fed’s balance sheet unwind.

The data highlights next week include flash PMIs released around the globe. The key focus will be on Europe given the recent slide in European manufacturing PMIs below 50, which indicates a contraction.

 

 

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