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Global Economy & Markets, Weekly Roundup 27/11/18

27/11/2018 - Reports

Global Economy and Markets

G-20 meeting, Italy and Brexit are expected to shape markets in the next couple of weeks

Key Takeaways

Global equities have extended their losses, so far, in November (MSCI ACWI: -1.9% | -7.4% ytd), following a large decline of 7.6% in October, dashing hopes for a sustained rebound on the back of slowing world growth, trade tensions and European politics.

The US technology sector has underperformed (-6.1% wow | -7.8% in November), with several bellwether corporates down by over 20% from their recent highs, hitting the S&P500 (-3.8% wow | -2.9% in November).

Similarly, the EuroStoxx’s Oil & Gas sector has recorded losses of 8.4% in November, due to the significant decline in oil prices (Brent: -21% in November | -12% ytd) with investor attention turning to the OPEC meeting for possible oil production cuts in order to support oil prices (December 6th).

Weak risk sentiment and lower oil prices have weighed on yields, supporting core government bond prices (UST 10Yr: -2 bps wow and -10 bps in November to 3.04% with a total return of +0.8%). Moreover, Germany Bund yields declined (10Yr down by -3 bps wow and -5 bps in November to 0.34%) on the back of disappointing business surveys, with the euro area composite PMI down further in November (by 0.7 pts to a 4-year low of 52.4), weaker H2:18 growth and uncertainty over the Italian Budget.

The euro recorded losses in the past week (-0.7% against the USD to $1.134) following soft PMI data, albeit it has remained broadly flat in November (+0.2% |-5.5% ytd). Investors appear to have pushed back their expectations for a rate hike by the ECB to Q1:2020 (probability of rate hike below 50% for the October 2019 meeting vs circa 100% a month ago).

Overall, equity markets have failed to recoup their October losses, despite strong US earnings and less exuberant valuations (see Asset Allocation). Year-to-date, most assets have recorded negative returns due to either idiosyncratic (EMs, Italy, UK) or broader macro events (e.g. slowing growth, trade). Notable exclusions include the USD cash and German Bunds.

Looking forward, investors is expected to seek guidance regarding market prospects from other catalysts, such as the Trump/Xi meeting in the G20 summit (Nov. 30/Dec. 1). A potential positive outcome (e.g. hints of extending policy discussions in the coming weeks or a less likely decision to postpone the scheduled increase in US tariffs to 25% from 10% on $200bn worth of imports in January 2019) could provide near-term support to risk assets, prompting a mild relief rally, albeit President Trump said on Monday that will probably move ahead with raising US tariffs in January.

Moreover, risk premia remain high in Italy (where the Government is eager to re-start negotiating with the EU regarding its 2019 Budget) and regarding Brexit (where PM May will endeavor to ratify the Withdrawal Agreement in Parliament in early December), suggesting that positive developments on these fronts could support some relief support to risk assets.