Weekly View – Extend and pretend

The CIO office’s view of the week ahead.

On Sunday, President Donald Trump prolonged market calm by confirming over Twitter that he would extend the deadline for raising tariffs on USD 200 billion of Chinese goods beyond 1 March. He omitted reference to a new deadline as well as any specifics on the “substantial progress” in talks between the world’s two largest economies. Whether Trump will succeed in extracting the concessions sought from the Chinese government remains to be seen, but we can be sure that he will be focused on generating good news on his original campaign promises ahead of his 2020 re-election bid. Averting the next round of tariffs threatened would be good news for the US consumer, as well as the Chinese economy.

Adding further support to market sentiment, last week the US Federal Reserve (Fed) announced that it would slow down its programme to unwind quantitative easing (QE). The Fed’s continued dovishness is welcomed by investors who feared the continued rate hikes and balance sheet shrinkage would kill the US economic cycle and dry up liquidity. The Fed’s attempt to reduce its balance sheet, which had ballooned in the wake of the financial crisis, prompted the global market sell-off. Since its dovish turn, high yield markets have rebounded significantly year-to-date, particularly in the US. We are keeping our focus on quality in the fixed income space and are particularly cautious on developed market high yield as fundamentals continue to weaken.

Data and indicators in Europe give us more reason for caution around risk assets. The German economy narrowly avoided recession in Q4, while the German manufacturing Purchasing Managers’ Index (PMI) has dipped into contraction territory (below 50) as export demand weakens. The domestic picture is brighter, however, with Germany’s services PMI rebounding strongly since the start of the year. The opposite is true for France, the euro area’s second-largest economy after Germany. The French manufacturing PMI climbed back into expansion territory (above 50) in February, while the services PMI remains below the threshold, although trending back upward recently. As a result of these mixed signals and continued uncertainty, we remain cautious and neutral on global equities for now.

 

César Pérez Ruiz, Head of Investments & CIO

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