Global weekly: Lurking political risks

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Downbeat economic data, including weakness in US manufacturing, pushed equity markets lower this week. A weaker US dollar and easing financial conditions, however, should support the recovery of the US economy in the coming quarters.

Over the next few months, political risks in Europe are expected to rise. As the Brexit referendum (23 June) nears, the prospect of the UK leaving the EU starts to dominate headlines. Recent polls showed that the odds of the UK remaining in the EU have increased. Betting markets are moving in the same direction, with bookmakers increasingly betting on British voters saying ‘no’ to a Brexit. Our base case scenario is that the UK will remain in the EU.

Equity markets update

Markets were volatile this week. Europe and Asia lagged compared to other regions. US markets also declined, but this was somewhat offset as the US dollar depreciated relative to other currencies. A shift to more defensive sectors has occurred. Utilities, as well as the consumer discretionary and
consumer staples sectors, rose. As the rally in commodities stalled, the energy and materials sectors declined.

The US earnings season is nearing its end, with two-thirds of the companies having already reported their first-quarter numbers. Overall, earnings are slightly ahead of expectations, but revenues are lagging. Company outlooks consist mostly of a reiteration of previous statements. In the short term, these results are not a trigger for the markets to continue to rally. In Europe, the trend is similar. European companies, however, are also faced with a strengthening euro and the threat of Britain leaving the European Union.

Asian indices fell, as the Bank of Japan did not announce additional monetary stimulus. In reaction, the Japanese yen strengthened substantially. China manufacturing data was also disappointing.

After two months of rising stock prices, markets lost ground this week. Profit-taking could trigger a further decline. Profit-taking was a factor in our decision to reduce equity exposure in mid-April.

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