Weekly View – “Draghed” down
The CIO office’s view of the week ahead.
ECB chief Mario Draghi confirmed a gloomy outlook on the European economy last week in announcing a monetary policy U-turn of his own. Not only were euro area growth and inflation projections cut, but an interest rate hike was ruled out for 2019. The central bank will also launch a new programme of targeted long-term refinancing operations (TLTRO) – loans to euro area banks – but under less generous terms than had been expected by markets, given that these loans will be indexed at the refi rate (0.0%), rather than at the lower deposit rate (-0.40%). Major stock markets suffered their worst week since December on the back of the unoptimistic outlook, with bank stocks particularly hard hit, while Italian government bonds rallied. We prefer to play banks via fixed income over equity markets as the new TLTRO programme considerably eases any funding risk.
Data showed further weakness across the board last week – from China to the US. Most notable was the sharp contraction in Chinese exports, which fell by over 20% year-on-year (y-o-y) in February, after having rebounded in January (likely due to the Chinese New Year holiday effect). Unsurprisingly, the fall in shipments to the US was particularly acute, dropping by nearly 29%, y-o-y in February. In the US, new jobs created came in far below expectations at 20,000 versus the 186,000 anticipated. While something to monitor, this is likely just a blip, as wage growth came in stronger than expected at the same time, while unemployment remains low. We are confident there will be a US-China trade agreement and that growth will pick up in H2. However, data looks set to continue its disappointing course in the meantime, so we took profits in our equity portfolios last week.
We may see more clarity around Brexit this week. We think we could see an extension of the 29 March deadline, prolonging market uncertainty. While the chances of Prime Minister May getting her deal past parliament look pretty slim at this point, they at least look more likely than a no-deal Brexit this month. The pound is under pressure ahead of the vote, but as a much needed silver lining, this tends to be good for large-cap UK equities.
César Pérez Ruiz, Head of Investments & CIO