Global Weekly: Bumpy road ahead

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The week started off with data on the slowing Chinese economy. The Chinese economy grew with 6.4% in the fourth quarter of 2018, while for the whole year GDP growth came out at 6.6%. Equity markets did not really respond to this, as this slowdown was widely expected.

Even though the economy grew with the slowest pace since the start of 2009, we expect the Chinese economy to stabilize. Chinese policymakers have the possibility to support the economy with monetary measures and the tensions around the US-China trade conflict seem to be decreasing somewhat.

Meanwhile in the US, the government shutdown continues, and at this point, a possible solution seems far away. In Europe, we saw the economic momentum further deteriorate with weak German manufacturing numbers and also, the French economy continues to show weakness. Regarding Brexit, there are signals that the Brexit deadline might be extended.

The earnings season in the US is now moving into full swing, where almost 20% of the S&P 500 companies has published results. So far, the majority of the companies surprised both on sales and earnings number. We saw good results coming in from Procter & Gamble, Comcast, United Technologies and IBM. For IBM it was the first revenue growth since 2011. We believe it will remain an important player in the technology sector.

In Europe, the picture was different. We saw disappointing results from Henkel and UBS. But we saw the European technology sector performing well, with positive stock price reactions to the results of ASML and STMicroelectronics. Also, the trading update of Ahold Delhaize was well appreciated by investors. It will be interesting to see how the earnings season will evolve over the next couple of weeks. We expect it to be a bumpy road.

Has risk aversion peaked?

Uncertainty keeps dominating financial markets and global politics, but risk aversion seems to have peaked for the moment. The question is whether this is marking a turning point or just a pause.

After a few weeks into 2019 and after the holiday season, we are now better able to distinguish noise from signal. After a bumpy start, the downward spiral of recession fears no longer dominates bond markets as it did by the end of last year. US Treasury yields are grinding higher and the inversion at the short end of the yield curve is fading. (A yield curve inversion could point to an upcoming recession.) The Fed has practically promised to take a pause for now. Hopes for a rate cut by the end of the year, however, are balanced again by risks that the Fed is not completely done with this rate hike cycle yet. German Bund yields are back at the levels of mid-December, too.

The riskier bond markets show a more pronounced rebound. Corporate bond spreads are back at levels of early December in investment grade bonds, and high yield bonds on levels of November. Emerging market spreads have been relatively resilient over the last few months, and are now trading at levels already seen last summer. All in all, both high yield and emerging markets are up 2 to 3% this year so far, compensating some of their losses last year.

Less risky bond markets, including Italian government bonds, are still struggling to show a positive result for 2019. Their rebound is vulnerable and will need support from incoming data. This is, however, not happening yet. China has reported lower (trade) numbers. In Europe, Brexit remains a source of concern, while PMIs and other leading indicators continue to disappoint. Worries about escalating trade conflict remain, despite some hopeful signs. And also, the US government shutdown reached record levels.

Given that so many analysts are currently pessimistic, chances of positive surprises could be increasing rapidly in all regions. Policy makers will need to deliver on increasing hopes for decisive action on a broad range of issues, however, before investors may feel confident that any improvement in data will be more than just a temporary incident. Until then, caution should prevail.

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