Weekly View - One last try
Mario Draghi has now done (nearly) all that it takes to support the euro area economy. With only weeks left in his term as ECB president, Draghi deployed almost all that remains in the central bank’s toolkit. Following last Thursday’s meeting, he confirmed not only the expected interest rate cut, but also the relaunch of the quantitative easing (QE) bond-buying programme. He fell short of lifting issuer limits, which markets took negatively. Christine Lagarde, who takes over the ECB helm next month, will need to address this issue in order to sustain this round of bond-buying beyond nine months, as until then, there is a one-third limit on the amount of outstanding bonds the central bank can hold from any single country. For now, Draghi’s last act has favoured funding for Italian banks, making them more liquid. However, we remain negative on core European bonds for now.
Trump made a grand gesture toward China in agreeing to postpone the tariff increase, scheduled for 1 October to avoid coinciding with the 70th anniversary of the founding of the People’s Republic of China. The mini trade truce that followed triggered a market rotation to cyclical stocks. In the absence of economic data to support such a shift this was mainly due to short covering, as evidenced by the underperformance of EM equities. We prefer playing valuation via Japanese equities ahead of a potential pickup however, and remain negative on EM.
Boris’s Brexit spectacle came to a head last week with the five-week (possibly unlawful) suspension of parliament. It now looks like he will be forced to seek an extension to the current Brexit Halloween deadline, or even bring a version of May’s deal back to parliament. Regardless of the Brexit outcome, the fiscal stimulus that has been committed will provide much needed support to the UK economy, so we have moved to neutral on UK equities.