Weekly View – “Macronomics” to the rescue

The CIO office’s view of the week ahead.

In an attempt to quell the widespread unrest and disruption caused by the “gilets jaunes” protesting against fuel tax rises, French president Emmanuel Macron announced a fiscal plan to the tune of EUR10bn. Without countermeasures, this spending increase will push France into a deficit of above 3% in 2019, to as high as 3.4%. As an indirect consequence, Italian sovereign spreads tightened on market hopes that the EU would show lenience in its 2019 budget negotiations with Italy as a result. What is key for us to watch now is whether Italian and European growth will meet expectations, particularly in light of last week’s poor European PMI readings.

The European Central Bank confirmed it would end its quantitative easing (QE) programme this month. In the US this week, the Federal Reserve (Fed) will meet to confirm whether it raises rates for a fourth time this year. We expect the Fed to relinquish its forward guidance, as one of the three key policy tools at its disposal, in addition to interest rates and QE. Against a backdrop of fourth-quarter weakness from US manufacturing surveys to Chinese economic growth, whether the slight pickup in US retail sales in November is enough to keep the Fed on its current tightening track remains to be seen. We remain neutral on equities and maintain some puts as this year’s Santa rally is threatening not to come.

And finally, we would be remiss not to include our tuppence on last week’s series of UK-related drama. In addition to Theresa May surviving a vote of no-confidence, the European Court of Justice ruled that the UK could unilaterally revoke Article 50, its path to withdraw from the EU. In our view, while Brexit uncertainty and unpredictability remain high, the risk of a hard Brexit has lessened, while the chance of a second referendum or some version of a soft Brexit is rising. As the market-disrupting news headlines continue, we emphasise the importance of keeping a cool head and distinguishing what is significant to the final outcome from the news noise.

César Pérez Ruiz, Head of Investments & CIO

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