Global Weekly: Equities – earnings season in full swing

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Despite the collapse of the Purchasing Manager Index (PMI) in Europe, and the PMI Manufacturing in the US reaching 50, its lowest reading in nearly a decade, global equity markets extended their gains this week, with the S&P 500 and Nasdaq indices reaching new highs. The main drivers were better-than-expected corporate results, news that a US delegation will travel to China next week in order to restart negotiations and increasing belief – fuelled by weaker macro data – in a 25-basis-points interest rate cut by the Fed next week.

On the earnings front, more than 100 S&P 500 companies released their quarterly results since the beginning of the month. So far, results are coming in better than feared, as 76% of the reporting companies have beaten profit expectations, with earnings coming in 5% above consensus, according to Bloomberg. Sector wise, positive earnings surprises were mainly seen in the technology, health care and industrials sectors, while company results in the utilities, consumer discretionary and materials sectors were less convincing. Although better-than-expected results might comfort investors in the short term, the picture for the third and fourth quarter is deteriorating. In fact, earnings estimates for the second half of the year have been lowered by analysts, as companies failed to raise their guidance. If the earnings consensus would still prove to be overly optimistic for the end of the year, it could urge investors to take profits on their equity holdings in the coming months.

Within the IT sector – one of our strongest active sector positions – key internet platforms such as Amazon, Google and Facebook seem to be facing increased regulatory pressure. Following Facebook’s USD 5 billion settlement with the Federal Trade Commission, the Department of Justice announced on Tuesday a large antitrust investigation into the way in which online platforms have achieved their market power. This is the start of a very long process but regulatory pressure is definitely rising for online platforms on both sides of the Atlantic.

In the UK, Boris Johnson won the party leadership contest, entering 10 Downing Street with a highly reshuffled Cabinet formed with hardcore brexiters. During one of his first speeches as prime minister, he promised to deliver Brexit on 31 October with “no ifs or buts”.

Bonds – central banks on a one-way street?

Last year November, when Fed fund rates were around 220 basis points (bp), investors expected that the interest rate would decrease by about 70 bp until the end of 2020 – equivalent to three rate cuts by the Fed. As a consequence, markets currently anticipate at least three rate cuts, with the first one (25 bp) to be announced next week. Whether these easing measures will provide substantial support to the US economy needs to be observed. And once the Fed has started its easing phase through 2020, it will certainly struggle to reverse its course as the next presidential election campaign will gain more momentum, particularly during the summer period. Ten-year US Treasury yields should trade around 2% until there are more hints from the press conference following the Fed policymakers’ meeting next Wednesday and the upcoming employment data on next Friday.

Based on the continuously weak economic data in the eurozone, the ECB changed its forward guidance at its meeting on Thursday, paving the way for both a cut in interest rates and a restart of the net asset purchase programme soon. The design of the ECB’s easing programme is still uncertain. Markets expect policy actions to start at the latest in September. Yields on 10-year Bunds, which again broke the -40 bp lower limit which is equivalent to the deposit facility rate, could certainly test lower levels. In the short-term, a correction remains due with around -20 bp as the upper trading limit. 

The asset class that is benefitting most from the current shift in US central bank policy is emerging market debt (EMD). As a consequence, we keep our overweight in both sub asset classes, that is in sovereign and corporate EMD. These bonds can be interesting for investors, as these countries are growing faster than developed countries, have lower debts and are able to quickly implement structural reforms if urgently needed. Therefore, we still assume that different country-specific emerging market stories remain good sources of return in our portfolio.

In the investment-grade space, we still prefer euro corporate bonds. We also hold on to our (slightly) overweight position in peripheral sovereign bonds in order to benefit from the benign circumstances derived from loose monetary policy actions.

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