Insight Multi-Asset weekly update – week commencing 2 September, 2019

From

Market and economic review 

US-China trade uncertainties drive risk sentiment

Risk assets performed well over the week as US-China trade tensions improved. Due to an escalation in US-China trade tensions at the end of last week investors began Monday on the back foot. However, the nervousness was quickly alleviated as President Trump, whilst attending the G7 meeting in France, stated he had spoken with the Chinese administration over the weekend, and that they were eager to “get back to the [negotiation] table”. This went some way to calm the market, as investors could salvage some hope that the trade talks, scheduled for September in Washington, will go ahead.

Thursday saw risk assets take another leg higher, boosted by comments from the Chinese Ministry of Commerce, suggesting that they were reluctant to further escalate the trade war. All the uncertainty surrounding the US-China trade negotiations made for some choppy intra-day price action, but ultimately led global equities to rally over 3%.

A new Italian coalition government is on the cards

On Thursday, Italy’s president, Sergio Mattarella, invited outgoing Prime Minister Giuseppe Conte, aligned with the Five Star Movement, to form a new administration with the Democratic Party. The previous coalition was thrown into disarray after Matteo Salvini, leader of the Northern League Party, tabled a vote of no confidence in early August. Italian equities rallied and bond yields fell as investors viewed the new coalition as a more market friendly proposition. The temporary improvement in political stability, leading to lower yields, supports Italy’s debt sustainability issues in the short term. That said, questions remain about the stability of the coalition going forward, as both parties have a history of bitter rivalry, and will be tested over the coming months as they preside over the budget process. 

Prime Minister Johnson raises the stakes regarding Brexit

The pace of the Brexit process accelerated as Prime Minister Boris Johnson took the unconventional step to prorogue Parliament. This will suspend Parliament for up to five weeks from mid-September, which significantly reduces the timeframe for the opponents of a no-deal Brexit to frustrate the process. There is significant opposition to this move by pro-remain MPs, including a number of Tory rebels, who are attempting to form a temporary cross-party government, which would aim to gain another extension from the European Commission.

Parliament is due to reconvene on 3 September and begin its prorogation on 10 September, returning in mid-October, two weeks before the Brexit deadline. While these recent developments would suggest a no-deal Brexit is increasingly likely, the market reaction was muted, with sterling only weakening by 0.65% on the day. The betting odds of a no-deal Brexit remain broadly unchanged on the week at around 40%.

German data continues to disappoint

Last week’s data schedule was very light, with a limited number of top-tier releases. In Germany, the IFO survey and Q2 GDP data were released early in the week. Both releases were disappointing, with Q2 GDP falling 0.1% quarter on quarter, and both the IFO current and expected business conditions missing consensus. The primary drivers for the slowdown were

weaker investment, weaker consumer spending, and a plunge in net exports. Later in the week, further weak CPI data (-0.1% year over year) printed and was the lowest since November 2016. The backdrop remains bleak for the German economy as it remains perilously close to falling into a technical recession.

In the US, durable goods orders beat consensus (2.1% vs.1.3% expected), boosted by a rebound in orders for Boeing aircraft. Core orders (ex-transport) fared worse, falling 0.4% versus a flat consensus.

Outlook

The week ahead will be busy on the data front. Monday will see European purchasing managers’ indices (PMIs) and the Chinese Caixin manufacturing readings released, offering some insight into the health of manufacturing growth in both regions, which have been weak for some time.

The US manufacturing ISM will be released on Tuesday. We will pay close attention to this data to see if it continues to converge to the Markit manufacturing PMI, which recently fell into recessionary territory. While the Markit manufacturing PMI provides useful guidance on US manufacturing activity, we consider the US manufacturing ISM to be a more useful gauge of activity. Regular readers will know the importance we place on PMIs as a useful real-time indicator of activity within our investment framework. Rounding off a busy week for data we will receive the August US employment report and German industrial production figures.

Along with the important data docket, there will be focus on central banks as the Reserve Bank of Australia and Bank of Canada are scheduled to meet. The start of September will also see the imposition of new US import tariffs levied on certain Chinese goods. Finally, given that the UK Parliament re-opens on 3 September, further Brexit developments should be expected.

By Adam Kibble, Investment Specialist, Insight Investment Australia

You must be logged in to post or view comments.