Global Weekly: A deal in the making?

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Equity markets had a positive week with gains of 4% (S&P500) and 1% (Eurostoxx 600), fuelled by the more relaxed words of the US Fed. Equity investors are eagerly looking forward to a trade deal between the US and China, hopefully closed at the G20 in Buenos Aires this week.

Fed Chairman Jay Powell commented Wednesday that interest rates are “just below” a range of estimates of the so-called neutral level. This fuelled speculation that there could be fewer rate hikes than the market currently expects. This is in line with our conviction that the end of rate hikes will rather be sooner than later. We now expect one rate hike this year and only one instead of two in 2019.

At the beginning of the week, sales figures of Black Friday came in. This time, not only the big e-commerce companies profited, but - since long ago - now also traditional retailers booked nice sales. Consumer electronics retailer Best Buy gained 3% on Monday. On Wednesday, CRM software player Salesforce reported better-than-expected results. Management reported that some European clients were hesitating, because of the weakening economy, but since the IT spending is so critical for them, they kept ordering. The stock jumped more than 10%.

The trade war between US and China remains one of the key focus points of the market. In an interview at the beginning of the week, US President Trump boldly said that it is likely that he will raise import tariffs on Chinese goods from 10 to 25%. But on Wednesday, the NY Times reported that a deal is pending as the effects of the tariffs are hurting the US economy too much. A group of US manufactures unitedly commented that higher tariffs will not bring more US jobs, only higher prices.

Although a deal would relieve the stock market, we assess the chance as low, as the conflict is revolving around more than just trade. It is also about intellectual property and strategic dominance moving to China. The G20 meeting in Buenos Aires, Argentina, will therefore be under scrutiny, as Trump will meet Chinese President Xi. Any hints for tensions easing this weekend will surely be positive for risky assets.

Bonds: A bit more relaxed

The latest meeting of the Fed has confirmed the market’s expectations on the likelihood of an extra rate hike before the end of the year, though shallower than forecasted by analysts. In the meanwhile, Italy showed some welcome flexibility in the discussion around its deficit.

In the latest meeting of the US Federal Reserve, Chair Jay Powell praised the robust US economy, but adopted a more relaxed tone giving hints that the Fed is nearer than thought to slowing down the pace on rate hikes through 2019. The impact of these subtext guidelines had a limited impact on US Treasuries. Still, it drove down the 2-year US Treasury yields to 2.80% (-4 basis points, bps) and the 10-year US Treasury to 3% (-4 bps). At this stage, the market has priced out the probability of more than one rate hike in 2019.

In Europe, the Italian government - fearing European Commission (EC) sanctions - showed signs of flexibility, suggesting it could reduce its deficit from 2.4% to 2.2%. It remains unclear whether this will be enough to convince the EC to negotiate. The efforts were welcomed by the market, however. The 10-year Italian bonds fell to 3.25% - the lowest level since September - and spreads to 290 bps - well below the 325 bps reached earlier this month. On 3 and 4 December, eurozone and finance ministers will meet in Brussels to decide whether the EC should launch an official “excessive deficit procedure” against Italy.

On the credit side, the latest Fed guidelines should have a positive impact on US yields. US high yield showed in October and November a massive drop, nearly erasing the positive performance of the year. This is due to its correlation to oil price, worries regarding the high leverage levels of corporates and lower economic growth in 2019. In Europe, the high yield sector has suffered too, due to the ongoing turmoil linked to the Italian budget, the Brexit and the lower positive economic indicators. The coming weeks should give a first political outcome and will for sure have an impact on the European market.

In the coming days, the G20 summit will take place in Buenos Aires, Argentina. Also, US President Donald Trump and his Chinese counterpart Xi Jinping will meet and they are expected to address the ongoing trade war between the US and China. Will this result in a tango? Trump will also have the opportunity to remind his Saudi Arabian partners how much he wants to see an oil price drop in the loom of the OPEC meeting in early December. These two themes will shape the direction of the global market until the end of 2018.