Weekly View – Temporary open ahead of a crucial week

The CIO office’s view of the week ahead.

President Trump put a temporary end to the shutdown on Friday after signing a funding package that reopens the US government for business until 15 February. Federal workers will receive their back pay, but the president continues to hold firm on his demand for funding for a border wall, threatening to resume the shutdown if a deal with Congress is not reached in three weeks. His disapproval ratings have reached their highest in a year due to the shutdown. We have revised our US GDP growth forecast for 2019 down to 2.2% from 2.4% as a result of the shutdown’s impact on the economy.

This will be a crucial week for market watchers. Earnings reporting season continues with the big US tech players’ results due, following a week when earnings at the margin continued to be slightly better than expected. Further weakness from China would put more pressure on US equities, which could impact the US’s bargaining positioning in trade negotiations in Washington this week. If a trade deal is not reached by 1 March, the US has vowed to impose new tariffs on Chinese goods. The recent People’s Bank of China (PBoC) decision to allow commercial banks to issue perpetual bonds shows the central bank’s commitment to improve liquidity conditions in the economy. Despite continued uncertainty around China in the meantime, we continue to view emerging markets (EM) more favourably. With a weaker US dollar and moderated inflation fears making central banks potentially less defensive, we have added an overweight to EM currencies.

The economic outlook in Europe continues to erode, with Purchasing Managers’ Index (PMI) surveys trending toward contraction. Earnings growth risks on the continent are tilted to the downside, diminishing the chances that the European Central Bank (ECB) will raise rates this year. In the UK, we will be watching for whether parliament takes control of the Brexit process. Sterling has rallied recently on the basis of a ‘no deal’ exit becoming less likely. However, we are mindful that ‘no deal’ remains on the table – despite not being our core scenario – and have downgraded our UK equity conviction to neutral in the interim.

César Pérez Ruiz, Head of Investments & CIO

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