Equities continue to recover on the back of positive earnings announcements by major US banks and trade optimism
The recovery continues in risk assets ytd relative to the mid-December 2018 equity lows (highs for corporate spreads). The scheduled visit by Chinese Vice Premier Liu He to Washington on January 30-31 is a positive signal for an eventual agreement. Moreover, news that China could increase US goods imports cumulatively by circa $1tn over a 6-year period in order to reduce bilateral trade imbalances (surplus: $411bn 12m sum in Oct. 2018) has supported risk appetite (See our brief summary on the 2019 US Economy on page 2).
With China’s economy facing headwinds both externally (weaker global growth and trade) and internally (softer demand, deleveraging), a trade deal could remove some of the uncertainty on the outlook and back policy easing efforts. Note that GDP growth decelerated to 6.4% yoy in Q4:18, the slowest since Q1:09, from 6.5% in Q3. In 2018, the economy grew by 6.6%, from 6.9% in 2017. On a positive note, there were some tentative signs that the pace of deceleration eased in December, as retail sales and industrial production were better than expected.
The ECB is expected to remain on hold (MRO: 0.0%, DFR:-0.4%) at its meeting on Thursday (24/1), following the termination of net QE/asset purchases in December. Policymakers will acknowledge the recent slowdown in growth, but in view of the transitory nature of some of the factors precipitating the softness in data, as well as the steady recovery in the labor market, the growth risk assessment may remain unchanged (i.e. “broadly balanced”), albeit is a close call. Note that Mr Draghi recently suggested that the euro area deceleration may be more prolonged than expected (EUR: -0.9% wow against the USD to $1.136).
More timely economic intelligence will be available prior to the meeting (euro area January PMI data is due on 24/1). Consensus expects the composite PMI figure to have recovered to 51.4 from 51.1 in December (a 4-year low). At these levels, growth momentum appears consistent with losing traction to 0.6-0.8% qoq annualized in Q1:19 (assuming no change in the January level) from 0.8-1.0% in Q4:18 and 1.8% in 2018 as a whole.
The British Parliament rejected PM May’s Withdrawal Agreement (WA) in the past week, with a 230-vote majority. As cross-party talks failed, PM May will likely try to renegotiate Brexit to secure EU concessions for the Irish backstop in an effort to get DUP and Conservative lawmakers to support a revised version of the WA. However, with the EU unlikely to concede, there is increased risk of extending the Brexit date (March 29th), if a hard Brexit is to be avoided. The GBP gained ground (+1.2% wow against the euro to €/0.883) and UK Gilt yields rose, as investors priced in less chance of a “no-deal” Brexit.
Global equities continued to recover (MSCI ACWI: 2% wow | 6% ytd), as US corporate earnings and positive trade news lifted sentiment (see page 3). Most major US banks began the earnings season on a positive note, with investors bidding up their prices (Banks: 8% | S&P500: 3%), while consensus expects double-digit S&P500 EPS growth to continue in Q4:18 (10.6% yoy vs 25.5% yoy, on average, between Q1 and Q3). On a similar note, core government bond yields increased across the board (UST 10Yr: +8 bps to 2.75% | German 10Yr Bunds: +2 bps to 0.29%), while credit spreads (especially in the high yield spectrum) narrowed further in the past week.