Global Weekly: Brextension

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Equity markets had a positive week. Despite disappointing Chinese import and export figures and disappointing US labour data, which pressured stock markets last week, sentiment turned positive this week. An impending trade deal between the US and China seems to be the main reason.

But whether a deal will be signed before the end of the month remains to be seen. Chinese President Xi Jinping seems to have removed from his agenda the meeting planned later this month with President Donald Trump.

Brexit dominated the news this week. There have been three main rounds of voting by the UK Parliament. The proposals on Tuesday (the current deal) and Wednesday (no deal) were both rejected by a large majority. On Thursday, however, the Parliament did agree to an extension of Article 50. The UK will now probably remain in the EU until at least June. The stock markets hardly responded to these developments. It was mainly the British pound that showed considerable movements. For many companies, that had been prepared for Brexit on 29 March, the decision to delay means higher costs and, again, uncertainty. Brexit will therefore continue to be regularly in the news in the coming weeks. Last night’s voting, however, did reduce the chance of a ‘no deal’ Brexit. The most likely possibilities are now thought to be a softer Brexit or no Brexit at all.

Regarding specific company news, it was a bit quieter this week, given that the earnings season is largely over. But there is still enough to write about. Boeing, for example, was in the spotlight after a second 737 Max aircraft crashed. As a result, most countries have decided to keep these aircraft on the ground for the time being. Boeing’s share price fell sharply. Apple announced an event on March 25, where it is expected to introduce an original video programming service and a new premium magazine subscription plan. There has also been a lot of news about a possible merger between Deutsche Bank and Commerzbank. Certainly now that German Finance Minister Olaf Scholz has suggested that the government is involved in informal merger talks. There is resistance. The move could threaten thousands of jobs, and the merger would not help to shore up Germany's finance sector.

Finally, more potential Democratic candidates for the US presidency are presenting themselves. All with interesting, even surprising, policy ideas. Elizabeth Warren, for example, came up with a plan to split-up the major IT companies. According to her, companies such as Amazon, Google and Apple are too large and have harmful effects on fair competition. Share prices of these companies had little, if no response, to her message. For the time being, it is just election rhetoric. Warren must first become the Democratic nominee for president, win the election and then pass such a law. All of this, of course, is still far off and far from certain.

Bonds: Treasury yields challenge lows

Brexit uncertainty looks set to continue now that the UK Parliament has agreed to an extension of Article 50, after voting this week to reject both Prime Minister Theresa May’s negotiated deal with the EU as well as a ‘no-deal’ exit.

Ten-year US government bonds are challenging their next, lower resistance level of 2.62%. If we go below this level, a new (lower) trading range will develop. Bond investors saw the latest comments of US and European monetary authorities as extremely dovish (accommodative) with a signal that inflation could stay far below their target level of 2%. If authorities would like to push inflation to around their target or higher, then they probably need to do more in terms of monetary policy. Our view is that central banks are currently not willing to do this. The current low government bond yields are extreme, as economists (including ABN AMRO’s) expect an improvement in the US and European economies. Europe looks like the more challenging situation. At this point, we and European Central Bank (ECB) policymakers still expect a sequential pick-up in European growth in the second half of 2019. This spurt should keep the ECB on track to raise rates for the first time at the end of 2020. We have no rate hike expectations for the US Federal Reserve in the meantime.

So while nominal emerging-markets bond yields have compressed significantly over the past quarter, the gap between emerging and developed market rates are meaningfully higher than the lows set in Spring 2018. The gap between short-end real rates in emerging markets and the US is also still modestly higher than the low point of Spring 2018. It also looks like the macroeconomic picture in emerging markets is beginning to shift in some subtle ways. This could keep the risk premium stable to positive in emerging markets. Overall, global growth may be bottoming. Oil prices have reversed some of their deep losses and a major part of core central banks’ dovish shift may already have occurred. This means that inflation might be stabilising; we do not think it will go much lower.