Weekly View – Two to tango

The CIO office’s view of the week ahead.

As expected, the US and Chinese presidents Donald Trump and Xi Jinping met to discuss trade alongside the G20 summit in Buenos Aires. For now, a tentative truce has been agreed, with Trump calling off further tariff rises in January. On its side, China will purchase an unspecified amount of goods from the US in order to reduce the trade deficit between the two countries. In the coming months however, further rounds of tricky discussions between the two countries will resume, with a reconciliation deal far from secure and a 90-day deadline for an agreement ticking. Chinese equities rallied as a result, which benefitted our portfolios after we recently added the asset class.

The Fed brought Christmas early to US equity markets after dovish comments from a previously steadfastly hawkish Chairman Powell that took us from a long way to neutral rates to just below. US equities enjoyed their best week in seven years as a result. This change in rhetoric could signal a nearer end to the current tightening cycle than previously anticipated, boding well for our scenario of the US dollar peaking sometime in 2019, which would be supportive of emerging market assets. Crucial to watch will be whether the Fed pauses before killing the cycle as in 1994, which would be positive for risky assets.

Meanwhile, news out of Europe continues to be mixed. On the positive side, Italy and the EU appear to be moving toward an agreement on the Italian budget, leading to an early rally in Italian markets last week. But at the same time, there is less reassuring news out of the UK and Spain. An agreement on Brexit looks far from secure as the 11 December UK parliamentary vote on Prime Minister May’s deal fast approaches. Political turmoil extended to the EU’s southern reaches following elections in the Spanish region of Andalusia, where a far-right party won regional parliament seats for the first time since Franco’s death in 1975. While the Socialists won the most number of seats, they lost their majority to the far-right Vox party, which secured 12 seats in the 109-member parliament. We can expect a backdrop of high political uncertainty to continue.

César Pérez Ruiz, Head of Investments & CIO

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