Insight Multi-Asset update – week beginning 11 February, 2020

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Market and economic review

As the week progressed fears of the coronavirus seemed to somewhat abate which, with the help of constructive data releases, allowed global equities to move to new all-time highs. Government bond yields moved higher, reversing part of the strong rally the market has seen since the turn of the year. In foreign exchange, emerging market currencies generally outperformed developed markets as investors tilted to a risk-on focus.

In other news, the US impeachment story finished with the senate voting to acquit President Trump as was widely expected since the beginning of the saga. We also received news from China that they intend to halve tariff rates on €75bn of US imports, as part of the recently agreed ‘phase one’ deal, from 14 February.

Financial markets mostly immune to the continued spread of coronavirus

Despite both the case and death count continuing to rise, market pricing implies investors are becoming less concerned about the potential economic impact of the coronavirus. In part, this may be due to the rate of increase of confirmed cases slowing down, in contrast to the exponential rate experienced towards the end of January. In addition to that, the virus seems to be relatively contained outside of the China. That said, there are notable risks to consider. Not only is the virus still spreading with confirmed cases and deaths increasing as each day passes, the economic impact of the epidemic both in China and more globally still remains uncertain.

What we did see is a strong policy response from China, including further cuts to both the 7 and 14-day repo rates and an injection of 150 billion yuan into money markets in an attempt to smooth the impact experienced as the financial markets reopened. Whilst we expect the impact on growth data will be negative over the coming weeks, it remains unclear how this will impact market sentiment.

Economic data helps to reinforce our view of a global economy in stabilisation phase

Based on economic data releases last week, it appears the state of the global economy entered a period of stabilisation leading into the coronavirus episode. As mentioned above, it remains to be seen whether this holds up as the impact of the virus tremors through growth data.

Focussing on that pre-coronavirus data, this week China’s January Caixin manufacturing PMI printed at 51.1 (vs. 51.0 expected). In the US, the manufacturing ISM significantly beat expectations rising to a 6-month high of 50.9 (vs. 48.5 expected), with new orders rising to 52.0 (vs. 47.7 expected) – its highest level since May 2019. The non-manufacturing ISM rose to 55.5 (vs. 55.1 expected) and its highest level since August.

We reported many of the Europe-based provisional PMI numbers in our last weekly note, which as a reminder generally overshot expectations. There were further upward revisions to those prints this week, including the UK composite PMI printing at 53.3 which marked the strongest reading since September 2018. The Eurozone composite PMI was also revised to 51.3, with Germany’s composite PMI printing at 51.2.

Lastly on the data front, Friday brought the release of the closely watched monthly US jobs numbers which followed a very strong ADP print earlier in the week. 225,000 jobs were added, which overshot the market expectation of 165,000, and is an increase from the December print of 145,000. The unemployment rate ticked up slightly to 3.6%.

Global earnings growth broadly flat for 2019

It was the last busy week of US earnings season with a further 97 companies reporting (representing 16% of S&P 500 market cap.) While clearly there have been bigger macro events driving equity markets over results season, we did find it notable that share price reaction for US companies reporting was skewed negative. This contrasts with Europe, where share price reaction has been more positive than average, perhaps indicating much lighter positioning in Europe vs. US. In both regions, and indeed globally, EPS growth for 2019 was broadly flat. Expectations for 2020 remain for around 10% growth in global EPS, a number which we feel is too high given the backdrop of declining margins and weak growth.

Outlook

US politics will remain a key focus for markets this coming week. After the less than smoothly run Iowa caucus last week, eyes turn to the New Hampshire primary where various polls and models seemingly give Bernie Sanders the highest chance of winning.

On the data front, attention turns to growth with preliminary GDP prints from both Germany and the UK. On the former, market expectation is for a 0.1% increase; however it comes after a relatively poor industrial production print, so one to watch closely.  We also receive US inflation data. 

Wrapping up on central bank activity, we will hear policy decisions from New Zealand and Sweden on Wednesday, followed by Mexico the following day.

By Adam Kibble

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