Investor attention focuses on fundamentals (earnings, trade, and monetary policy) following the expected outcome in the US mid-terms
The result of the US mid-term elections was in line with consensus estimates, with the Democrats winning the House of Representatives (D: 227 | R: 198) and the Republicans retaining their Senate majority (D: 47 | R: 51). Markets remained calm following the outcome.
The mid-terms result is not expected to materially alter the outlook on the US economy, which will continue to grow strongly in 2019 (+2.6%), but at a slower pace compared with 2018 (+2.9%). Prospects have eased regarding a new fiscal boost (e.g. via new tax cuts), while trade tensions will likely continue to increase.
The Fed maintained its policy rate unchanged in September (Federal Funds rate at 2.0-2.25%) and remained positive regarding the economy, albeit acknowledging a slowdown in business investment. The Fed is expected to resume rate increases in December.
The European Commission’s euro area real GDP forecasts were broadly unchanged at 2.1% for 2018 and 1.9% (-0.1 pp) for 2019, compared with its previous estimates (July ’18). Growth is expected to ease further in 2020 (1.7%). The Commission expects domestic demand to remain the main driver of growth as trade tensions and uncertainty dampen the contribution of the external sector.
Regarding Italy, the EC forecasts GDP growth of 1.2% in 2019 (vs the Government’s estimate of 1.5%, see graph below), which widens the budget deficit to -2.9% in 2019 (vs the Government’s estimate of -2.4%). The Italian authorities have until November 13 to submit a revised budget in compliance with EU fiscal rules, otherwise risking sanctions from the Commission.
Recent Chinese data were mixed, with business surveys weak, consistent with a gradual deceleration in economic growth. Trade exports were more resilient, inter alia, due to a weaker yuan (-1.6% mom | -5% yoy vs the USD). In all, slower activity ahead remains the most likely outcome (cons: 6.3% yoy on average in H1:19, versus 6.5% in H2:18 and 6.9% in H1:18).
Notwithstanding the Chinese Government’s communication suggesting that focus remains on quality rather quantity of growth (i.e. a slower but more sustainable pace of growth), the authorities have increased their efforts to alleviate near-term macro headwinds (partly stemming from the ongoing US/China tensions), gradually easing policy (primarily through RRR and personal income tax cuts). In the past week, regulators announced measures to enhance liquidity for private enterprises by promoting equity and bond issuance, and by setting targets for new bank credit to private companies (at ⅓ for large banks’ new loans and ⅔ for smaller banks, to be achieved within 3 years).
Global equity markets continued to recover in the past week (MSCI ACWI: +0.9% wow | -3.6% ytd), mainly driven by US equities (S&P500: +2.1% wow | +4% ytd), as strong US earnings growth sustained risk sentiment (+27% yoy in Q3:18 vs 19% expected at the start of the season). Emerging markets recorded losses (-2.1%), due to lower oil prices and Chinese banks under pressure following the new easing policies to temper growth concerns (-4.6% wow | -8.8% ytd). Renewed EM weakness was reflected in declining government bond yields on Friday (UST 10Yr: -6 bps on Friday | -3 bps wow at 3.18%, German 10Yr Bund: -5bps | -2 bps wow at 0.41%).