Weekly View: Swan song
In his last press conference as European Central Bank president, Mario Draghi reiterated that "economic risks remain tilted to the downside" and kept monetary policy unchanged. He also reemphasised the need for governments to step up and deliver fiscal policy that will support the faltering economy. On the back of further deterioration in European purchasing manager indices (PMIs) last week, Germany has indeed stepped up discussions around a fiscal-stimulus plan. Christian Kastrop, the original architect of Germany’s strict debt limit called for fresh public borrowing to finance investments across the country, adding his voice to the many already petitioning the government to up spending. German equities rose, despite the PMI weakness, as bad economic news increases the pressure for fiscal action.
If Germany appears to move in the right direction, Brexit is in limbo – but how long can it go? Boris Johnson is on the warpath, insisting on a 12 December general election lest he pull the deal off the table after the UK parliament refused to rush the legislation required to implement it. This story is likely to continue delivering twists and turns to the very end. Our base-case scenario remains that the EU will grant an extension – likely into January – with UK general elections being held in December. Barring any new curveballs, Johnson’s deal should ultimately prevail. However, the UK economy continues to suffer, and is unlikely to snap back quickly even after a deal is signed. For now, the worst case has been avoided and we are staying neutral in equities.
Q3 earnings continue to prove better than expected, albeit from a low bar. The portion of US companies to have beat net income expectations has rebounded, while the percentage of those exceeding sales expectations has shown an even steeper rise. In Europe, telecoms and Nordic banks have lagged. US dollar weakness has been supportive of stock prices in emerging markets, where Q3 sales have been surprisingly positive while earnings have been in line with flat growth expectations. While we will monitor Argentinean debt given the rating conditions and new leadership change, we prefer to play EM debt to EM equities.