Markets - 05.09.2019 - 3 min read time

Monthly Pulse #09 19: The global economy continues to be sluggish



The latest economic data from the Eurozone points to continued weakness. The situation is particularly worrying in the manufacturing sector. In recent weeks, the escalation screw in the trade conflict between the US and China has continued to turn.


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The global economy continues to be sluggish. The latest economic data from the Eurozone points to continued weakness. The situation is particularly worrying in the manufacturing sector. In recent weeks, the escalation screw in the trade conflict between the US and China has continued to turn. After all, the negotiations between the two countries are continuing and the tone has now eased somewhat.

So, what to expect this month? July and August were holiday months that kept central bankers and government officials largely on the side lines. Surely things start to happen soon. Same with asset managers when everyone starts repositioning into year end. Looking ahead, the FED, ECB and tariffs will all be major headlines risks that threaten to swamp any seasonal tailwinds, hence stay cautious.

Looking at the financial markets, central banks around the globe are responding to the slowdown in growth and the persistently low level of inflation with a renewed expansion of monetary policy. In the US, analysts expect two further interest rate cuts this year. Will the ECB follow the FED and drop a bombshell on September 12?

Markets are ready for the ECB to deliver a substantial easing package which consists of a new Quantitative Easing (QE) programme, rate cuts, tiering and new forward guidance. Analysts expect a QE of EUR 45bn over 15 months, implying an overall envelope of EUR 675bn, of which the majority would be sovereign bonds. The ECB will also most probably cut the deposit rate by 10bps to -0.5% and by another 10bps to -0.6% in October. The aim would be to have a stronger front-loaded impact and hence make the TLTRO facility more attractive. These are loans for commercial banks with a term of several years. Additionally, new interest rate forward guidance will make it clear that rates hikes will happen only long after the end of the new QE programme.

Bond markets markets have reacted with great uncertainty to the signs of economic weakness and the intensification of the trade conflict. The inversion of the US yield curve is a major cause of the increased fears of recession. Also due to regulatory reasons, such as the deposit of government bonds as collateral, have led to a structurally higher demand for govi bonds among institutional investors. This structural change has distorted the signal effect of the yield curve. We stay neutral in bonds.

Equity indices corrected more than 5% in the last month and volatility doubled in the wake of trade dispute and recession fears. However, fundamental concerns are increasing while we still see return potential for equities. It is too early to focus on European stocks, but a possible QE program by the ECB should be beneficial for this asset class. We remain slightly underweight and still prefer US equities.

EUR/USD remains under pressure although lots of bad news is priced in. However, a rate cut more than 10bp may push EUR lower and due to interest yield differential and funding currency. Gold Gold is still a tactical trade in the wake of the trade dispute and the FED shifted more dovish. We see room for the upside rather than having a correction but would not chase this rally at current levels. For oil September itself is neutral over the past decade with weakness due to hurricane season. Producers used to drive prices up but now the US is producing so much more oil that there is an equal risk of refinery shutdowns boosting inventories. This month it may not be the time to sell oil outright.



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