Weekly View – CIO view: May’s ‘TINA’ vote

The CIO office’s view of the week ahead.

Economic data came in weaker than expected last week, especially in China and Europe, and we can anticipate messy forthcoming US data, given the ongoing US government shutdown. In China, manufacturing survey readings dropped into contraction territory, which together with hard data points toward continued growth deceleration in China’s imports and exports. At the same time, Germany, Europe’s manufacturing powerhouse, saw a continued fall in industrial production in November, delivering its weakest performance since 2009. These developments point toward a technical recession, which is at risk of lasting longer should China’s growth continue to slow.

Prime Minister Theresa May continues to insist that that ‘there is no alternative’ (TINA) to her withdrawal agreement as members of parliament prepare to vote on it Tuesday. The good news is that as the chances of parliament taking over the process rise, the prospect of a ‘no deal’ outcome falls, while the possibility of no Brexit altogether becomes more feasible. At the same time, the idea of a second referendum (or early elections) continues to gain traction, while the prime minister holds a firm stance against it as she makes her final attempt to garner support for her deal. Uncertainty remains rife, but our central scenario remains for a smooth Brexit, with sterling appreciating toward USD 1.35 over a six-month time horizon.  

In markets, the ‘Powell put’ supported a rebound in equities as the US Federal Reserve (Fed) struck a dovish tone despite the continued strength of economic data. Equity markets rallied as investors interpreted Fed comments as an indication that it would pause rate rises given financial and market deterioration. The next determinant of market movements will come from the Q4 reporting season, which we do not hold high hopes for (but earnings forecasts have already been revised downward significantly). As markets became overcorrected and overextended, we sold the rest of our put options in portfolios, but remain neutral on equities overall. 

César Pérez Ruiz, Head of Investments & CIO

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