Weekly View – Moody’s to the rescue

The CIO office’s view of the week ahead.

Italian bond prices regained some ground after Moody’s cut Italy’s credit rating by one notch on Friday, keeping it within investment grade, while upgrading its outlook from negative to stable. Investors welcomed this as positive news while they anticipate Italy’s response to Brussels’ criticism of its proposed 2019 budget due later today. This could prove an eventful week for peripheral bonds driven by news around Italy, with rating agency S&P also expected to update its position on Italy at the end of the week. Meanwhile, in corporate bonds, the bankruptcy filing announcement of retail giant Sears sent its spread into deep distressed territory. We expect more adverse events ahead and are sticking to quality in credit.

In equity markets, the earnings reporting season has delivered a mixed bag so far. The key insight for equities markets will come from how Amazon and the other US tech leaders report this week. In Europe, big players across various sectors have disappointed. Philips’ earnings fell short of expectations on subdued growth and currency headwinds in emerging markets, Daimler issued its second profit warning this year, Michelin cut its forecasts, citing falling demand in China and Europe and Danone reported weak infant nutrition sales in China. The gloomy outlook for these exporters could be a symptom of rising trade tensions. We maintain our put options on client portfolios for protection in the meantime.

China’s economic growth dominated headlines after reports that it had slowed to 6.5% year-on-year in the third quarter, its lowest rate since the Great Financial Crisis and slightly lower than the 6.6% predicted. Subsequently, the government announced income and service sector tax cuts over the weekend, which markets celebrated with a sharp rally in Chinese equities. By stimulating household consumption, these cuts should offer support to the domestic economy as trade tensions with the US threaten exporters. The move confirms that China is seriously weighing the impact of the current trade conflict and taking pre-emptive measures to protect its economy. We believe these initiatives are meaningful and a signal that China is preparing for further escalation in US trade tensions.


César Pérez Ruiz, Head of Investments & CIO

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