Weekly View – The final countdown

The CIO office’s view of the week ahead.

Last week markets were relatively muted, with commodities down, developed markets flat and emerging markets up slightly. That brief period of calm has already ended, with Trump’s Sunday tweets sending Chinese markets sharply down on Monday. With the Chinese scheduled to attend the next round of trade negotiations in the US on Wednesday, the US president is putting extra pressure on China to concede to US demands and seal a deal through threats to increase tariffs on Chinese goods to 25% this Friday. Trump is in his full “art of the deal” mode as usual, but this may not work, given that the Chinese have cancelled talks in the past. We can expect a volatile week in markets ahead, but still think a deal between the two largest economies will be reached eventually.

Last week’s Fed meeting was as we expected, with rates kept on hold despite continued pressure from the Trump administration to cut them. The US economy is moderating but still strong with extremely low unemployment levels, although wage growth and inflation have not picked up to match. Chairman Powell has an uncanny ability to make an uneventful meeting market-moving, this time with his comments on “transitory inflation” standing in contrast with how low core inflation has been. We previously took advantage of low volatility levels to buy puts in our portfolios in case events escalate.

As earnings reporting season winds down, global earnings revisions are now (just) back in positive territory. The week ahead will be key for European companies, with 95 scheduled to report. So far this year, quality companies have outperformed those with weaker, more indebted balance sheets. Given the low interest rate environment, the quality, pricing power and growth companies that we have preferred should remain in favour this year, although as the economy rebounds in H2, we may see some rotation into cyclicals. In the week ahead, we will be watching for US Consumer Price Index figures on Friday as well as how the Chinese-US trade story unfolds.

 

César Pérez Ruiz, Head of Investments & CIO

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