Weekly View – Third time lucky?

The CIO office’s view of the week ahead.

Last week, “Brextension” was confirmed by the UK Parliament, which voted in favour of a Brexit delay by 413 to 202. However, we are far from out of the woods yet as the EU must next approve the request, for which the UK must offer a satisfactory justification as to why they need it and how it would be used. For this reason, Theresa May’s deal may pass a third vote in parliament this week. If not, a long extension is possible, with president of the European Council Donald Tusk already having given guidance that the EU should remain “open to a long extension”. We will be watching how the Brexit evolution unfolds this week.

On the bright side, good news out of Europe has finally surfaced, with positive industrial production growth in the euro area in January, driven by France, Italy and Spain. Surprises also turned positive, with the euro area even outpacing the US in latest data, according to the Citi Economic Surprise indices, a gauge of optimism about the economy. At the same time, EU banks’ credit stress is at its lowest levels since 2007, with the continued deleveraging of the Italian banking sector adding further support to the recovery. Bank profitability remains under pressure however, as shown by the merger talks between Deutsche Bank and Commerzbank. Year to date, European equities have outperformed their US peers. At the same time, the S&P 500 had its best week since November, rounding out an overall positive week for developed equities.

The Bank of Japan confirmed that it would keep its monetary policy unchanged and downgraded its outlook for the Japanese economy at the same time. This completed a hat trick of major central bank dovishness, with the central banks of the US, EU and now Japan potentially keeping interest rates lower for longer than previously expected. Despite a reduction in JGB purchases, Japanese sovereign rates moved into negative territory and now resemble those in Europe. This wave of central bank dovishness has facilitated the decline of corporate rates and volatility to levels below the summer of 2018, allowing equity valuations to expand without any rise in earnings estimates. We will be monitoring the Federal Reserve meeting minutes in the week ahead.

César Pérez Ruiz, Head of Investments & CIO

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