Weekly View – WE HAVE A DEAL!

The CIO office’s view of the week ahead.

Brexit and oil kept their centre-stage positions in last week’s headlines. Despite initial opposition from France and Spain, all 27 EU members agreed to Theresa May’s Brexit deal by lunchtime at Sunday’s European Council meeting. Could this be an indication of how poor the deal is for the UK? Despite May’s insistence that there is no alternative and this is the only deal available, we think she will have a hard time convincing the UK parliament and expect more drama ahead. We still do not rule out a “Hard Brexit” or a second referendum as possible outcomes and prefer not to take strong bets on the GBP due to the elevated uncertainty.

Meanwhile, Black Friday price-slashing extended to oil, with oil prices falling more than 6 per cent to below USD60 per barrel. While Trump seems to think this is good for the US economy, equivalent to a tax cut for consumers, we believe it is not so clear cut. With the shale oil boom, the US is now the world’s largest oil producer, and a plummeting price could soon threaten shale breakeven levels. Beyond that, US GDP growth has been consistent with rising oil prices. This relationship is even more obvious when looking at the state level, where big oil producers like Texas see particularly robust GDP growth when oil is strong. Generally tighter financial conditions and lower capex could also erode US GDP growth and make the Fed pause tightening sooner than expected. To avoid going too long duration, we have recently been buying 2-5 year Treasuries, which offer attractive real yields.

Lower-than-expected PMIs globally, and especially out of Europe, have a detrimental impact on the oil price, with not only export but also import sector PMIs declining. This is a theme to watch for at the G20 summit kicking off on Friday in Buenos Aires. However, the main event for us will be the side meetings between Trump and Xi Jinping on trade. Our central scenario is for a pause in new US tariffs on Chinese imports, while the existing tariffs remain in place. If there is no deal, risk assets will continue to suffer for another week. We are neutral equities with some protection to the downside in portfolios and prefer to stay on the quality side of credit with no overweight in high-yield instruments.

César Pérez Ruiz, Head of Investments & CIO

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