Global Weekly: Brexit, the trade war and the earnings season in focus

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Equity markets did not move that much at the start of this week. Investors were still digesting the US jobs report that was published last Friday. The US economy added more jobs than expected in March, and the wage growth data did not spur inflation fears.

While economic momentum has clearly been deteriorating, there have been some green shoots recently in China and the US. We have to wait and see if economic growth can possibly reaccelerate later this year. In Europe, the focus has once more been on Brexit. Prime Minister Theresa May and the EU decided on extending the Brexit deadline until 31 October, which makes the position of May in the UK even more difficult. It also means the Brexit discussions are set to linger.

The International Monetary Fund (IMF) has lowered its 2019 growth forecast for the global economy from 3.5% to 3.3%. The IMF is forecasting a weaker outlook for the most important economies and cite trade tariffs as a reason. While progress is being made in trade talks between China and the US, trade tensions between Europe and the US have escalated. The parties are accusing each other of benefiting domestic aircraft manufacturers and are threatening tariffs. The Dow Jones Index actually underperformed the S&P 500 Index and Nasdaq over the last few days, as Boeing took another big hit after its announcement that it will lower 737 Max jet production.

Today, the earnings season will kick off with financials JP Morgan and Wells Fargo reporting first-quarter results. Next week UnitedHealth, Netflix and IBM will give more insight. It will be interesting to see how the earnings season turns out, given that analysts have already substantially revised their estimates. This earnings season will definitely have the attention of investors, looking to gauge how companies expect to fare in a lower growth environment.

Bonds: Cause for optimism

Data from China confirmed the bottom in the cycle and signalled the success in policies implemented by the government, thereby reducing risks of a global slowdown –and fostering, in particular, Asia’s economy. Moreover, a more expansionary fiscal policy is expected in China for the coming months, although we need to watch out, as it could put upward pressure on their rates. The US Federal Reserve’s recent more accommodative (dovish) turn will likely extend the life of the cycle and could induce asset price inflation, and consequently, a positive wealth effect, due to increased liquidity. If we add the general consensus of a “vanishing” trade war between the US and China, we see an optimistic scenario for investments in general with yields tightening. However, it would be reasonable to watch for central banks’ reactions to this new (positive) outlook and to keep an eye on flow-of-funds data.

In emerging markets, the US yield curve remains inverted in some places and has historically not been a good sign for these assets. But with no immediate threats to the global economy, developing countries with strong fundamentals and a forecasted recovery in these regions in the second quarter, we decided to continue to favour emerging-markets debt. Nevertheless, as these assets have already performed well in 2019 and as political concerns remain, particularly in Argentina and Turkey, but with no contagion fears, we prefer hard currency emerging-market bonds versus local currency exposure.