Weekly View — Eyes on guidance

The CIO office's view of the week ahead

Last week delivered encouraging news on the outlook for global trade as improved Chinese exports and credit figures were seen as signs that the global trade slowdown would soon turn. On the back of March’s rebound in Chinese purchasing manager indices (PMIs), this means that as well as good news for the global trade outlook, the world’s second-largest economy may report better-than-expected Q1 2019 GDP this week.

Last week, the European Central Bank (ECB) left its assessment of the growth and inflation outlook largely unchanged from its March meeting. Draghi mentioned that pricing for its latest round of long-term loans to banks, TLTRO III, will be unveiled at “one of the forthcoming meetings”, probably in June with new staff projections. The key takeaway was that while the ECB should take new measures to support euro area banks (an eventual price tiering of TLTRO III, for example), in our view there will be no rate cut in 2019.

News flows out of China and Europe meant that equities markets moved higher at the end of last week, particularly cyclical sectors and European banks. But at around 17x earnings, equity prices leave little room for disappointment. While earnings downgrades have stabilised, this will be the first quarter with negative growth since 2016. As the Q1 earnings season advances, company guidance for 2019 will be crucial. Recently announced mega M&A transactions seem to indicate that corporate confidence is strong. This year, company earnings will not benefit from the Trump tax cuts as they did last year, and we will need to distinguish those companies with true margin growth.

Just a final note on Brexit. The most likely outcome we foresee is that there is another extension following the current 31 October deadline (50% probability). However, we also see an uncomfortably high chance of a no-deal Brexit (25%). Combining these probabilities means that, in our view, there is a 75% chance of no positive conclusion for UK assets in 2019, which is why we maintain our underweight position in UK assets.

Alexandre Tavazzi, Head of CIO Office and Global Strategist

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