Markets - 01.06.2019

Monthly Pulse #06 19: Fundamentals have taken a backseat in recent weeks

It comes as no surprise that fundamentals have taken a backseat in recent weeks. Markets fluctuate between hopes and fears in the all-dominant trade conflict. Although investors agree economic and financial risks have increased due to the intensification of the trade conflict, they do not wish to write off the possibility of a later settlement in the trade conflict.


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The outcome of the European Parliament elections was broadly in line with expectations. Pro-EU parties secured a clear majority of total seats, although parliament looks more fragmented than it did five years ago, with traditional centre-right and centre-left groups losing seats to Liberals and Greens, and Euro-sceptic parties increasing their share of votes. Ironically, for most of the economists, trouble for the nationalists is good news because their policies are generally bad for growth. Of course, it is too early to conclude that we are out of the woods in terms of their influence on policies, to be sure, lots of damage has already been done to the global outlook for growth – story to be continued.

Looking at the US macro, the escalating trade conflict with China has apparently thoroughly corrupted the mood of US companies. The Purchasing Manager Indices for example, deteriorated considerably in May according to the provisional evaluation. The data was collected in the second half of the month, i.e. after the increase in US punitive tariffs, Chinese goods imports were also included, which fully reflects the shock about the intensification of the trade conflict. Hence, the business outlook for the next 12 months has been more pessimistic than ever since the survey began in July 2012. At the current level, the PMI survey data signal an annualized growth of only slightly more than 1 percent, which would be well below the long-term potential. Not surprisingly, the FED has confirmed its wait-and-see monetary policy at the last FOMC meeting. It is convinced that the patient approach is still appropriate for some time. Therefore, markets do not expect an interest rate hike for this year.

Fixed Income markets continued to post a positive performance last month. While we expect financial conditions to remain accommodative and growth moderate, the yield curve is still inverted, and short-term bonds are yielding more. Hence, we favour a mix of short-duration credit risk and capital structure exposure and have a neutral position.

Equity markets have been somewhat mixed. Corporate data released in the past couple of weeks have surprised on the upside, supporting an improvement in earnings revisions. More importantly, major central banks have confirmed their patient stance and should support financial conditions and lead to an extension of the Equites by mid-term. However, in the short-term, trade tensions could nourish volatility further and lead to temporary setbacks. We stay at a slight underweight.

EUR/USD should continue to range trade. Its low volatility won’t change soon unless we see a shift in monetary policy – which is unlikely – or a spill over effect from other asset classes such as equities. JYP and CHF are facing higher demand as safe have currencies. Gold remains stuck around USD 1’300. The USD remains a key driver, but the inverse correlation with US yields has been picking up lately. Despite the recent price dip in oil, the US decision to end Iran sanctions waivers should keep near-term spot risks skewed to the upside and curves steeply backwards.



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