Weekly View – US retail flash crash

The CIO office’s view of the week ahead.

Last week we saw disappointing data across the board. In China, spending around the Lunar New Year Holiday grew at its lowest rate since 2011, reflecting the downward pressure burdening the Chinese consumer. Puzzlingly, December retail sales data in the US printed the biggest month-on-month decline since 2009, communicating a sharply contrasting message to the robust US jobs data. We suspect there could be a data error at play there. Meanwhile, with flat Q4 GDP growth, Germany narrowly avoided a technical recession, as the deteriorating demand for exports took its toll. In Japan, while Q4 GDP growth rebounded as widely expected, it was not as strong as anticipated, also due to deteriorating external demand. As a result, we have downgraded our 2019 GDP growth forecast for Japan to 0.8% from 1.0%. More broadly, we will need to see a turnaround in future data, or else it could be worrying for the global economic outlook.

Politics continued to keep us on our toes. President Trump suggested he could extend the deadline for new tariffs on China by two months, enabling negotiations between the world’s two largest economies to continue. Markets took this as good news. At home, a second federal government shutdown was averted after Trump signed a funding bill that included funding for a partial border fence with Mexico, but not a wall. Whether he is successful with the national emergency route he now attempts to take in order to build his wall is far from certain. In Europe, the Brexit drama carries on after Prime Minister May was again defeated in parliament, while Spain is now set to hold snap general elections in April after Prime Minister Sánchez lost a budget vote in parliament.

As the fourth quarter earnings season concludes, the results overall were better than feared. Most companies did not beat earnings expectations but the Q4 year-on-year growth rate was revised slightly upwards for the S&P 500. The picture for European companies was similar and the financials sector weighed on earnings surprises. Looking ahead, Q1 earnings are expected to decrease slightly, with earnings growth peaking in Q4 this year. On the positive side, energy-related earnings could soon be revised upwards as oil prices have already risen 30% from their December 2018 bottom.

César Pérez Ruiz, Head of Investments & CIO

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