Weekly View : We've got a deal
Good news drove last week’s risk-on sentiment in markets. On Friday, a trade truce was reached after the US agreed to a limited, tentative agreement with China, which Trump described as "phase one". US stocks rallied, ending the week slightly up. As we continue to monitor progress on the next phases of negotiations, reporting season has also come around again, starting with financials. Both earnings expectations and investor sentiment are downbeat, with conservative market positioning as a result. As many market participants and commentators anticipate an impending recession, there is room for surprise on the upside, especially if the consumer resilience we have seen in data comes through in company earnings. We do not expect an imminent recession and are neutral in equities.
Christine Lagarde will have her work cut out for her when she takes over the helm at the European Central Bank (ECB) next month. European bond markets were hit last week on the revelation of mounting discontent with the central bank’s latest bond-buying stimulus plan. Leaked ECB committee papers exposed its objection to the resumption of bond purchasing, advice that Draghi acted against for the first time in his presidency. Lagarde will face renewed easing policy with a bond market that just turned over nearly EUR 500mn of negative-yielding Greek three-month bills as well as USD-denominated Italian debt for the first time in nearly a decade. We remain underweight global government bonds and believe the yield curve will steepen.
Brexit will face a moment of truth this week with the European Council meeting kicking off on Thursday. Optimism over a deal reached a rare high following Boris Johnson’s private talks with the Irish Taoiseach Leo Varadkar last Thursday, just as the prospects of a deal touched a low point. The pound rose sharply, with markets celebrating any cause for hope – no matter how feeble. On Johnson’s side, he still needs to secure the EU’s agreement and then get it past a UK-parliament vote by 31 October. Plenty of thread that could unravel, but also still a chance to tie up a good outcome. We remain neutral on UK equities.