24.10.2019 08:53

Market outlook: Brighter political outlook generating hope, despite weak statistics

• Continued progress on the trade front
• New Brexit votes in the UK Parliament
• Chinese GDP growth is decelerating
• Riksbank will postpone its winter rate hike

Progress in trade talks and a corporate report season that is better so far than feared are buoying the market mood. Global stock markets, measured using the MSCI World Index in US dollars, rose another percentage point or so last week and has now gained about 16% since 2019 began.

Continued progress on the trade front
Last week we reported about a partial trade agreement between the United States and China and the postponement of October tariff hikes. White House economic advisor Larry Kudlow is now saying that US tariff hikes on Chinese goods announced for December may also be halted. We believe that this may also be in President Donald Trump's best interest, since these tariffs would affect consumer products to a greater extent and thereby directly hurt voters. Meanwhile investors are wondering whether this trade war cease-fire will actually last.

New Brexit votes in the UK Parliament
At last week's European Union summit, the United Kingdom and the EU reached a new Brexit agreement, but the UK Parliament must also reach agreement among its own members. Prime Minister Boris Johnson requested a series of votes during October 22-24 about the 110-page Brexit bill and 125 pages of explanatory notes that will regulate UK withdrawal from the EU.

Parliament approved the bill itself on October 22 by 329-299 but, minutes later, voted to reject the PM's fast-track timetable for the rest of the process. It appears that Johnson will now suspend further parliamentary action on the bill until the EU responds to the UK's request for an extension of EU withdrawal from October 31 until January 31, which he had reluctantly sent to the EU last weekend as stipulated by Parliament. Johnson has also threatened to pull the bill entirely and call an extra election, but this would require 2/3 parliamentary approval.

We see very little near-term risk that the UK will crash out of the EU with no deal. This is good for the British pound and for the financial market mood, but otherwise the Brexit process remains uncertain.

Chinese GDP growth is decelerating
China's 6% gross domestic product (GDP) growth for Q3 was somewhat below expectations and was the lowest in 30 years. On the plus side, a slight manufacturing recovery was apparent in September, while retail sales stayed relatively strong.

 

Our market view

Brighter political outlook generating hope, despite weak statistics
Recent hope of progress in political processes has provided support to stock markets. The current signals from US-Chinese trade talks are constructive, with new tariffs being postponed, while negotiations on UK withdrawal from the EU are pointing towards decreased risk of a "hard Brexit" (no-deal withdrawal).

Dovish signals from central banks are providing support, while long-term bond yields have largely continued their downward trend, though with extensive fluctuations. However, we are seeing continued signals of deceleration in the real economy. Both US industrial production and Chinese GDP growth were more anaemic than expected in last week's economic news. Meanwhile European statistics are pointing to a weak growth picture. Germany must be regarded as technically in a recession.

The uncertain economic situation, along with stock markets at high levels, suggests more fluctuations ahead – especially since the Brexit drama may provide new surprises, in a Europe shaken by weak economic statistics.

Because of continued extremely low bond yields and interest rates, the lack of alternatives to equities is striking. Meanwhile credit spreads (the gap between government and corporate bond yields) are being squeezed by the search for returns, combined with renewed central bank stimulus measures.

We have a continued cautious attitude towards stock markets in the near term, while awaiting further third quarter corporate reports. The few reports that have been published so far must be regarded as better than previously feared, but with stock market indices close to earlier peaks there is an obvious risk that good news is already priced in.

This week's agenda

  • Oct 24 – Riksbank interest rate announcement
    After mostly weaker data since its September key interest rate announcement, we believe that Sweden's Riksbank will postpone its planned key rate hike from December or February until April, but our forecast is that the repo rate will remain unchanged during the coming year.
  • Oct 24 – Norges Bank interest rate announcement
    The market's focus will probably be on any comments by the Norwegian central bank about the record-weak krone, although no one is expecting new rate hikes aimed at countering this trend.
  • Oct 24 – ECB interest rate announcement
    After the European Central Bank's deposit rate cut in September, we do not expect any new forward guidance. This will be Mario Draghi's final policy meeting after eight years as ECB president before Christine Lagarde takes over in November.
  • Oct 24 – Markit purchasing managers' indices for the US and euro area
    Some stabilisation is expected, but a continued decline in manufacturing activity.
  • Oct 25 – Swedish retail sales
    After a weak spring, sales recovered during the summer and we expect that they strengthened further in September.