Global Weekly: Solid consumption, weak production

News item -

Equity markets modestly appreciated this week, recouping last week’s losses, even though there was no progress on the trade front between Chinese leader Xi Jinping and US President Donald Trump. Trump even stated that he was “not ready to make a deal with China”.

Around the world, discussions about fiscal stimulus surfaced again, also in Germany. The country is considering a EUR 50 billion package to bolster the domestic economy and consumer spending. Sticking to a balanced-budget policy for roughly ten years, has allowed Germany to slash public debt to 60% of gross domestic product, from 83% over the past decade. Weak industrial production weighs on the economy, however. German GDP contracted by a modest 0.1% in the second quarter. We expect the recession in Germany’s industrial sector to intensify in the third quarter. Moreover, financing conditions have never been that attractive, with Germany having sold the world's first 30-year bond with zero coupon at an average yield of -0.11% this week.

In the US, the retail sector was in focus this week, with Estee Lauder, Target and Lowe’s among the companies reporting their quarterly results. All three companies reported better-than-expected earnings and expanding profit margins. This supports the sentiment for consumption, which remains a robust pillar of US economic growth. Now, the focus shifts towards deteriorating manufacturing data, also in the US, with the manufacturing PMI released on Thursday.

In terms of sector performance, consumer discretionary and IT achieved the best performance, while financials -and bank stocks in particular- continued to suffer from declining yields. Since we expect yields to remain low, we are comfortable with our underweight recommendation for the sector.

Waiting for delivery

Deliverance is coming, as we expect the ECB to announce fresh rounds of economic stimulus in a few weeks. This is what is holding up markets, balancing between a slowing global economy and a pent-up anticipation of stimulation packages from central banks and governments, in order to curb this slow-down.

Besides this anticipation, a number of negative factors could derail markets, such as the trade war between the US and China, Italian politics, a potential no-deal Brexit, and the situation in Iran. In that respect, the returns we have seen on assets this year, are mostly there because of this anticipation. The continued decline of forward-looking macro-indicators would suggest the returns should otherwise have been far lower.

In these markets, sometimes unexpected things happen, such as Spanish bonds becoming less anchored to other peripheral bonds, like Italian government bonds. Spanish bonds now behave more like semi-core bonds, such as France and Belgium.

In the meantime, there are many questions around the characteristics of the ECB stimulus packages. Will the ECB, unintentionally, trigger renewed political upheaval in the eurozone, by increasing the northern/southern divide? Will the bank increase the percentage it can hold of the entire market, and if so, by how much? Will it re-launch the corporate bond purchasing programme, or will it even start to buy equities? And will the ECB be able to prevent to force banks to impose negative savings rates to clients?

In short, the market anticipation has done a lot, but much of the deliverance of the ECB stimulus is not clear. One thing is clear, though: we are stuck with negative interest rates for a very long time. We remain overweight in duration and investment-grade corporate bonds in our portfolios, anticipating on the ECB to deliver.