Global Weekly: Equities - Show time!

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Before the Fed’s 25 basis point reduction in key interest rates this week, the market was hesitating over whether the cut would be 25 or 50 basis points (bp). This was owing to the Fed’s accommodative (‘dovish’) stance since the beginning of the year as well as President Donald Trump’s outspoken view on monetary policy. The 25 bp cut was not a unanimous decision by Fed policymakers. It was based more on weak global growth and trade tensions than the US economy. Weak inflation expectations and corporate investment counter-balanced the healthy employment and consumption data that allowed the Fed to go ahead with the move.

While Fed Chairman Jerome Powell delivered the consensus expectation of a 25 bp rate reduction, the first in a decade, he called the cut a ‘midcycle adjustment’ and not the beginning of a trend.

Not surprisingly, the market reacted negatively to the news, with the US market ending in negative territory and European futures declining. The US dollar rose to below 1.11.

Regarding the trade dispute between the US and China, although negotiations have taken place, nothing material has emerged. The next opportunity now appears to be in September.

Market attention will now focus on earnings results and, in particular, 2020 expectations. After downward revisions over the last few quarters, results are ahead of expectations. Over 75% of the S&P 500 Index companies have reported and, on average, these companies have seen better than expected sales and earnings of 1.16% and 5.3% respectively, according to Bloomberg. On the earnings side, surprises are coming mainly from the information technology, utilities and health care sectors.

Since mid-July, ABN AMRO’s asset allocation has called for an underweight in stocks. In terms of regions, we maintain an overweight stance toward the US, an underweight in Europe and a neutral stance toward emerging markets.

Bonds - Starring role for central banks

There is now quantitative evidence to show how negative a trade war can be for economic growth. Data from Germany and France have been disappointing and exports from China and other Asian economies has fallen, revealing cracks in the global economy. The US, on the other hand, is resilient, due to its large domestic market. Trade talks this week were described by both sides as constructive. Although it appears that China is willing to negotiate, they are not in a hurry. The evolution of further tariffs therefore remains a risk until the next scheduled negotiations in September. 

Considering the slowdown in global growth, monetary policies are key for stabilization. Central banks seem to have decided to extend the business cycle by cutting rates as far as needed, taking advantage of low and steady inflation. The Federal Reserve lowered US interest rates by 25 basis points this week, in a widely anticipated easing that was the Fed’s first since 2008. The ECB has also opened the door to further rate cuts; and ECB President Mario Draghi has been clear about a new asset purchase programme as well. 

The Fed’s easing is supportive for high-yield bonds. In the search for returns, high-return assets, such  as (global) high-yield bonds and emerging-markets debt (both sovereigns and corporates) have been performing strongly, particularly during the last two months. Emerging market sovereigns had more room to rise and performed better than corporates. The Fed’s rate cut could bring another positive appraisal of fixed-income assets in the coming weeks. Asia (developed and emerging) is still expected to grow at a considerable rate above 6%, but all Latin American countries’ GDP growth forecasts have been revised down to worrisome levels. For Latin American countries, a favourable outcome from any of their political uncertainties could mean an improvement in their fixed-income assets.