Insight Multi-Asset weekly update: European Central Bank meeting on Thursday likely to be the biggest market focus


Market and economic review

Risk assets trade sideways on busy week for growth data and US earnings

Global equities ended last week broadly flat despite a busy period for global growth data and 20% of S&P 500 Index market cap reporting Q2 earnings. Earnings growth thus far has been slightly ahead of expectations, but in aggregate, share price reaction has been muted for both beats and misses. As has been the case in recent weeks, the biggest moves were in the government bond market where 10-year yields in the US, Europe and UK fell -7bp, -14bp and -10bp respectively. These moves came despite activity data in both the US and China beating expectations. Indeed, the yield move was more driven by continued anticipation for synchronised central bank easing, with dovish comments from a number of Fed speakers contributing to the move. For the July meeting, a 25bp rate cut is completely priced in, while markets are also pricing in a 40% chance for a 50bp cut. This falling yield backdrop was helpful for emerging market assets, with emerging market currency and bonds posting small positive returns on the week.

Chinese activity data beat expectations, while US data highlighted domestic consumer strength

There were encouraging signs of stabilisation in global growth data this week, with a number of important activity indicators beating expectations. This kicked off at the start of the week with a raft of Chinese data. GDP at 6.2% year-on-year (y/y), which represents the slowest pace of growth in China for several decades; however, this was widely expected. Of more interest to us were the more timely monthly activity indicators. Here, all three June prints surprised to the upside, including industrial production (+6.3% y/y versus +5.2% expected), retail sales (+9.8% versus +8.5% expected), and fixed asset investment (+5.8% y/y versus +5.5% expected). These growth rates were also all higher than last month, providing tentative signs that stimulus measures are starting to bear fruit.

In the US, we saw continued divergence between a strong domestic consumer and a weak industrial sector. Retail sales growth was +0.4% month-on-month (m/m), above expectations for +0.2% growth. The annualised retail control reading for Q2 was +7.5%, which represents the highest quarterly print since Q4 2005. This suggests that US consumption looks set for a sharp rebound in the Q2 GDP report. In contrast, industrial production missed expectations, printing at 0% growth versus +0.1% m/m expected. There was a small beat in the manufacturing output component, which rose +0.4%, versus 0.3% expected; however, this sector is now technically in recession, with two consecutive quarters posting negative growth. There were, however, some encouraging signs for the manufacturing sector, with beats in both the Empire State and Philadelphia Fed surveys. Survey data was less positive in Europe, where the headline ZEW expectations index in Germany fell to -24.5 in July from 21.1 in June, below the consensus for -22.0.

US earnings kicks off with mixed results, while share price reactions muted thus far

US earnings kicked into gear last week; the headline earnings-per-share growth rate now stands at -1.7%, which is a small improvement on pre-season expectations for -2.8%. The first half of the week was dominated by banks reporting, the results of which were quite mixed, but in aggregate the share price reaction was a small positive. Revenues were hurt by lower net interest income, caused by recent rate declines, and a number of banks reduced guidance on expectation of further net interest margin declines this year. However, on the positive front, there were strong revenues from retail-facing divisions, echoing the domestic strength in the US discussed above. 

There was further bottom-up confirmation of macro themes, with two US railway companies reporting results, CSX and Union Pacific. For both firms, freight volumes were down, with at least part of the fall attributable to trade tensions. Another casualty of the trade dispute was SAP, Europe’s largest software company, where management blamed US-China trade tensions for disappointing software sales in Asia. There was more positive news from US tech giant Microsoft, which beat expectations, thanks to strong sales in its cloud computing business. In aggregate, share price reaction has been relatively muted in the US, although there are a number of important bellwethers due to report next week


On a very busy week for both data and earnings, the European Central Bank (ECB) meeting on Thursday is still likely to be the biggest market focus. ECB President Mario Draghi used last month’s Sintra conference to highlight the central bank’s willingness to take stimulative policy action amidst a background of low inflation and downside growth risks. While market expectations for any cut in interest rates at this meeting is currently at 40%, we anticipate at the least we will get more clarity on the policy path for the rest of the year.

The key data release this week will be the July flash manufacturing PMIs in Japan, Europe and the US. Last month saw the aggregate global manufacturing PMI print in contractionary territory for the second consecutive month. Given the pick-up in US survey data and increase in activity data discussed above, it will be interesting if the PMIs also follow suit. 

US companies continue to report quarterly earnings this week, with 30% of S&P 500 Index market cap due to report. This includes a number of important industrial bellwethers, such as Boeing and Caterpillar, along with large technology names, such as Alphabet and Intel. Our continued focus is on forward guidance from management concerning the ongoing US- China trade tensions and any asymmetry in share price reaction.

On the political front, we also will continue to monitor for any signs of concrete developments on the trade front, given the lack of progress since the G20 truce. In the UK, we will get official confirmation of the next prime minister, where Boris Johnson remains the clear favourite.

By Adam Kibble, Investment Specialist

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