Global Weekly: Equity markets take a breather

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After reaching new all-time highs, equity markets softly retreated later in the week. Investors took a breather, after rumours poured into the market that the partial trade deal between US and China may not be completed by the end of 2019. Partly rolling back tariffs apparently is a quite important part of the deal for the Chinese, but for the US it is not (yet) so straightforward.

On Monday, Saudi-Aramco, the world largest oil giant, revealed the price range of its public offering. The estimated worth of between USD 1.5 and 1.7 trillion (!) was at the low end of expectations and was perhaps influenced by the ongoing energy transition. In fact, the International Energy Agency is predicting that global oil demand will hit a plateau around 2030, due to the use of more efficient cars and electric vehicles.

Meanwhile, the third quarter earnings season has almost come to an end, on balance, with results coming in ahead of lowered expectations. Company guidance for the coming quarters is, on average, perhaps best qualified as cautiously optimistic, under the condition that geopolitical issues do not go off the rails.

Still, there was some fireworks coming from US retail with Home Depot, Kohl’s and Macy’s surprising on the downside, whereas Lowe’s and especially Target surprised on the upside. Positioning and market strategy continues to be key within retail, making a world of difference in terms of results. Meanwhile in Europe, the luxury giant LVMH is said to have laid its eyes on Tiffany, to further build on its already impressive global luxury business.

Bonds: all about politics

Investor sentiment is still dominated by the level of noise stemming from (geo)political stories, rather than fundamental data, which – in general – are not too bad.

In that respect, the current focus is on the robust US consumer, where hopes remain that they do not break. Nevertheless, the bigger picture for financial markets over the next twelve months will be dominated by Trump’s performance in the polls for the next US presidential election in 2020. Accordingly, the US Federal Reserve (Fed) is expected to remain on the side-line and will observe the level of uncertainty closely, by knowing that Trump did not win the last presidential election, but Hillary Clinton had lost. Therefore, it officially reverts back to its data-dependency mode.

As a consequence, the 10-year US Treasury yield – which recently climbed on the back of some progress in the US-China trade conflict and the decreasing likelihood of a hard Brexit – should remain within its broader range, capped by 2%.

In Germany, technically, there is some room for Bund yields to drop again in the short term. There is, however, a small but non-negligible risk lingering regarding the party convention of the German social democrats (SPD) from 6 to 8 December. Concerns remain that the current coalition will not remain firm much longer, given the undermining results for the SPD in almost every regional election since the summer period, when it tentatively re-shuffled its organisation. We do, however, not see a significant rise in yields for the time being, as support from key central banks remains strong and inflation expectations still remain subdued.

In the European periphery, spreads have been widening, particularly in Italy, showing that the Italian political situation still remains fragile and that the honeymoon of the new government has come to an end. The most recent regional elections in Umbria could be perceived as a first harbinger. We remain vigilant and will continue monitor the situation closely, also on the back of two regional elections that will be held in January 2020 in Emilia-Romagna and Calabria.