Weekly multi-asset desk views

Weekly review: 18 October 2019

Weekly Mag updates

Summary

  • Geopolitical developments: Brexit progress but US-China trade dispute ongoing
  • Data suggests a stabilisation in conditions for China, but less so for the US
  • US earnings kicked off this week with banks the main focus

Market and economic review

This week was characterised by relatively light trading volumes across markets. There was similarly limited progress in the ongoing trade dispute between the US and China. Global equities did gradually climb higher throughout the week, with reaction to US earnings particularly positive. European government bond yields rose on the back of a Brexit deal being reached in principle – more on that below. The US dollar was slightly weaker across the board, partly in response to the market pricing in a higher probability that the Federal Reserve (Fed) will cut interest rates at the end of October meeting.

Tuesday saw the release of the IMF global growth forecast, where their headline estimate has fallen to 3% this year, down from 3.2% in their April report. For 2020, they have lowered their forecast by 0.1% to 3.4%.

Geopolitical developments: Brexit progress but US-China trade dispute ongoing

Building on an eventful week at the start of October, the news flow that followed on a potential trade deal between the US and China was limited. The US announced a ‘phase one’ deal in principle with China, which suspended the planned tariffs that were due to commence on 15 October. In return, China was understood to have committed to purchase US agricultural products and reform their intellectual property protections and financial market openness. Subsequent headlines suggested that China wanted further negotiations before signing a deal, and have pushed for the removal of the planned December tariffs. Once again the market waits for further clarity on the matter.

Slightly more encouragingly, there was meaningful progress on a resolution to the Brexit impasse. Negotiations that took place throughout the week resulted in a deal being agreed between the UK prime minister and European Union for the UK’s departure from the bloc. News that a deal had been agreed broke on Thursday, but Prime Minister Boris Johnson still has the complicated task of getting the deal through the UK Parliament on Saturday. With the Democratic Unionist Party (DUP) not offering support for the deal, Prime Minister Johnson will likely need to rely on support from the group of 21 Conservative MPs whom he previously removed the whip from and Labour MPs that could vote against their party line. Even if the deal does not pass through Parliament on Saturday, a deal being agreed materially removes the chance of a no-deal Brexit, which is unambiguously an improvement as far as markets are concerned. Indeed, since the initial announcement on 9 October that progress was being made, sterling has strengthened 5.6% vs the US dollar (at the time of writing).

Data suggests an improvement in conditions for China, but less so for the US

Last week, we pointed towards important data for China, with the most important data releases being industrial production, retail sales, fixed asset investment and GDP. The China GDP figure was softer at 6% year-on-year (y/y), slightly below expectations, retail sales printed as expected at 7.8% y/y, and the industrial production number was strong (5.8% y/y versus an expected 4.9%). Commentary out of China suggested that there is more room for both fiscal and monetary easing should it be required, but previous accommodation seems to be offsetting any major effect from the ongoing trade war.

In the US, the focus was on the industrial production release, particularly in light of the very poor September ISM numbers. This printed at -0.4% month-on-month (m/m) versus an expected -0.2% and a previous print of +0.6%. Delving beyond the headline number, the weakness was driven by a 4.2% plunge in the production of autos and parts, in part reflecting an ongoing issue between General Motors and the United Automobile Workers union. Retail sales were also disappointing, printing at -0.3% versus an expected 0.3%. At the margin this adds further pressure on the Federal Reserve to stimulate the economy via an interest rate cut at the October meeting, which the market now prices as an 82% probability.

Earnings

US earnings season kicked off in earnest this week with 15% of market cap reporting. The headline EPS growth rate currently stands at -3.7%, which is in line with pre-season expectations for -3.8%. The week was dominated by banks reporting, the results of which were generally ahead of expectations, but the key takeaway for us was the very positive aggregate share-price reaction. Price reaction to earnings is something we monitor quite closely as any asymmetry in price moves can offer valuable insight into sentiment and positioning. While it is still early days, the indication so far is that equity positioning could be relatively light, with Netflix and United Health (+8%) also posting strong returns after their releases.

Outlook

US companies continue to report quarterly earnings next week with 30% of S&P 500 Index market cap reporting. This includes a number of important industrial bellwethers such as Boeing and Caterpillar along with large technology names such as Microsoft and Amazon. Our continued focus is on forward guidance from management concerning the impact of ongoing US- China trade tensions and any asymmetry in share price reaction.

Mario Draghi has his final European Central Bank meeting as president on 24 October. While there is no expectation for a change in their monetary policy stance, we expect further appeals for governments to do their part by supporting the monetary stimulus with fiscal packages.

On the data front, the main focus will be on the preliminary October manufacturing, service and composite PMI prints across the US, euro area, Germany, France and Japan.

Lastly, at the time of writing, 19 October could be an important day in the history of UK politics as Parliament convenes to agree the next chapter of the Brexit story. The range of outcomes remains wide, from the Brexit deal being agreed to a move to a general election.

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