Weekly View : Catacl-ISM
Following weak US manufacturing data, disappointing services and jobs data released last week triggered a correction in US equities. Investors fled from risk after the world’s biggest economy finally succumbed to the slowdown wave unfurling from Europe to China. Government bonds benefitted, with US Treasury yields narrowing. Equities markets from Asia to Europe followed suit. At the same time, the US has added Europe to its trade black list, moving to impose 25% tariffs on a range of EU goods from apparel to cheese. There is some room for hope that the new US weakness could pressure Trump to reach a trade deal - or at least truce – when he goes into negotiations next week with China to avoid a poor economy at home as he moves into full re-election campaign mode.
In Brexit land, the Democratic Unionist party’s possible acceptance of Boris Johnson’s post- Brexit Irish border system provided some grounds for optimism. Securing support for a deal in the UK Parliament is at the very least a first necessary step for Johnson to secure a Brexit deal. Getting the EU to agree is another story. A leak last week suggests Johnson will seek an extension if a deal is not reached by mid-October. Compromise on both sides will be required at the margin, but a deal is more likely than it was the week before, justifying our upgrading of UK equities to neutral a few weeks ago.
The People’s Republic of China celebrated its 70th birthday (as did Bruce Springsteen, aka ‘The Boss’). Now the world’s second largest, the Chinese economy has undergone an impressive and turbulent development process over the last seven decades. Last week, against broader fears of slowing Chinese growth, PMIs out of China surprised on the upside, suggesting growth could rebound modestly in Q4. Given the significant headwinds we see for the Chinese economy, we are keeping our 2019 Chinese growth forecast unchanged at 6.3% as we await hard data to confirm any improvement.