Global Weekly: Equities in calmer waters

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The earnings season in the US continues to paint a good picture for equities. More than 400 companies in the S&P 500 have reported, and almost 78% of them surprised to the upside, with an aggregate surprise of 4.65%.

Many of the companies increased their guidance for the coming quarters, the most recent example being Qualcomm. Management gave a stronger-than-predicted forecast, indicating that smartphone demand fuelled by new wireless technology starts to pick up.

Another recent theme in the market has been one of stocks rallying on the back of cutting numbers. On Tuesday, in the fertiliser sector, both Nutrien and Mosaic moved higher on the back of a lowered guidance. Investors’ perception seems to be that the sector has seen the worst. This coincides with the fact that especially value stocks start to perform.

For the European earnings season, the picture is not as bright as in the US. More than 330 companies in the STOXX 600 have reported so far, with 56% beating estimates. Nevertheless, the hope of easing trade tensions between China and the US is one of the main drivers of European markets. Investors are looking for cyclical stocks, mainly banks and exporters.

One highlight in the industry sector was Vestas Wind Systems. The Danish manufacturer of land-based wind turbines beat highest earnings estimates as sales soared 30% and orders hit a new record, in contrast with the stumbling results from rival manufacturers.

As we see both macro and market data improving, we feel comfortable with our new neutral positioning in equities.

Bonds: A Lagarde effect?

Per 1 November, Christine Lagarde has replaced Mario Draghi as the President of the European Central Bank (ECB). Will this have an effect on the ECB monetary policy? Two aspects to watch closely.

Lagarde is joining the ECB against a backdrop of soft growth, low inflation and an ultra-loose monetary policy. Looking forward regarding the ECB’s monetary policy, there are two drivers to monitor: whether the existing monetary stance might change and whether new policy instruments will be employed.

It is not expected that Lagarde will significantly shift the balance of opinions within the divided Governing Council of the ECB. Our central forecast is still for one rate cut of 10 basis point in the first quarter of 2020 (with a current interest rate of minus 0.50) and a continued and growing asset purchasing programme. The programme restarted at 1 November with EUR 20 billion a month, and we expect that the size will further grow with another EUR 20 billion in March to EUR 40 billion a month.

The topic of policy instruments could come to the fore in another downturn. Beside more asset purchasing and further rate cuts, options range from buying equities to yield curve control. Beyond that, themes to watch might include debates on whether to buy more green bonds as part of the asset purchasing programme, and a further push to convince governments to loosen fiscal policy. With a divided Governing Council, a focus on the latter policy looks like the most ideal and accepted option for now.