Weekly View – Tech-tonic shifts

The CIO office’s view of the week ahead.

Last week’s continued equities sell-off was driven by disappointment with the earnings reporting season. Having propped up market returns for much of this year, tech’s poor performance was particularly noteworthy. Last week, below-expectation metrics from Amazon and Alphabet (Google’s parent company) flattened the S&P 500’s returns for 2018, while European equities have been much more disappointing. Excepting financials, top-line data are driving investor anxiety, with only about 45% of S&P 500 companies that have reported Q3 results so far having beaten expectations. Markets find this especially concerning given earnings growth is expected to slow significantly in coming quarters. We took the opportunity of the market decline to sell one-third of our put options in client portfolios.

Angela Merkel’s announcement that she will not seek a new mandate as German chancellor adds a further layer of uncertainty to a European Union that is already showing signs of slowing economic momentum and is having to deal with a strident new Italian government and deeply unsettling Brexit negotiations. European Parliament elections next May are unlikely to clear the air. All of these factors complicate the European Central Bank’s plans for unwinding quantitative easing: we remain neutral on core euro area bonds and underweight peripheral euro area paper.

Far-right presidential candidate Jair Bolsonaro swept to victory in Brazil on Sunday. Encouraged by his promises on economic reform, Brazilian markets had already been rallying: the Ibovespa index is up 9% since the start of October, bucking the trend in global equity markets, and the Brazilian real has strengthened against the dollar (even as the Chinese renminbi has sunk to a 10-year low). We think the rebound in some currencies (the Turkish lira and Argentinian peso have notably recovered) may have been overdone in view of Fed hawkishness.

 

César Pérez Ruiz, Head of Investments & CIO

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