Weekly View – Still ‘closed’ for business
The CIO office’s view of the week ahead.
The US government shutdown marched into its fifth week, making it the longest in US history, with 800,000 ‘non-essential’ federal workers and even more contractors affected. While it is concerning that there seems to be no end in sight, there are also some potential positive effects that could play out in the economy. Any damage to economic growth is likely to be minimal and confined to the period of the shutdown. Once it ends, there will be a fresh flood of spending after furloughed workers receive their back pay, pushing the possibility of a recession further out. The Federal Reserve (Fed) is also more likely to remain patient on the next interest rate hike until at least Q2, which is a positive for both market sentiment and the economic cycle. With underlying momentum still decent, we remain confident in the health of the US economy.
After a disappointing 2018, 2019 has delivered positive returns for most asset classes so far. Notably, risk assets have rebounded, although the assumptions behind this (including a US-China trade truce and a pivot in Fed policy) are far from certain. While a trade agreement may be within reach, the tech issue will likely be less straightforward to resolve. Financials, which were particularly hard hit in December as the yield curve flattened, have since recovered most losses. While large US banks have delivered disappointing Q4 results so far, their outlook is more optimistic. Indeed, with the current US macro fundamentals, a more dovish Fed and low absolute and relative valuations, many US banks are starting to look attractive.
As the 29 March Brexit deadline looms ever closer, the British parliament has instructed the prime minster to present a ‘plan B’ today, following her divorce deal’s historic parliamentary defeat last week. While a ‘no-deal’ Brexit remains a possibility, the most likely outcome is some sort of ‘soft Brexit’ in our view, with an extension to the 29 March deadline increasingly likely. UK equities have climbed higher while sterling has held up on the hopes of a bipartisan agreement. This has supported our currency play and on a three-month horizon, we see sterling appreciating to USD1.32.
César Pérez Ruiz, Head of Investments & CIO