2019 earnings forecasts losing momentum
Rising markets and declining forecasts highlight the impact of lower rates on valuations
Author: Alastair George
It can hardly be a surprise, given the recent sharp declines in PMI indices on a global basis, that 2019 earnings forecasts have once again started to decline. Markets have rallied since Mario Draghi’s dovish commentary last week, which was quickly followed by a bullish interpretation of the US Federal Reserve’s interest rate decision. However we believe investors also need to pay attention to weakening trends in corporate profits which are likely to persist in our view, at least until PMI indices turn higher.
Read more...Minimal capitulation from the FOMC
US rate cuts in prospect - but Fed still waiting to see impact of uncertainties on data
Author: Alastair George
Yesterday’s FOMC statement and Fed Chair Powell’s press conference may have satisfied those looking for US rate cuts later in 2019. However, we see in both the statement and the press conference an uncharacteristic reluctance to react pre-emptively. This is despite a lowering of the central projection for inflation by 0.3% to a below-target 1.5% for 2019. It would have been relatively straightforward in our view to have argued for a cut now.
Read more...Whatever it takes… all over again!
Déjà vu for Draghi – but his departure beckons
Author: Alastair George
With eurozone core inflation falling to 0.8% year-on-year in May and 5-year forward inflation expectations falling to under 1.2% in recent weeks, indications from the ECB that all options are on the table to return inflation to below but close to 2% can hardly be a surprise. Adding to a steady flow of sourced and unsourced press commentary by ECB policymakers since this weekend, outgoing ECB President Draghi has effectively promised to do whatever it takes – all over again – to bring eurozone inflation back to target. This is unambiguously positive for eurozone bonds, negative for the euro and in combination with an expected easing of monetary policy in the US, supportive of gold.
[visualizer id=“77455”]Source: Refinitiv at 18 June 2019
Read more...Could the US Fed be enabling a continuation of the trade war?
US Fed commentary counters the negative effects of US trade policy
Doveish comments from a number of US Fed policymakers in recent days have validated a very sharp decline in US interest rate expectations. In response to these comments, US equities have also rallied. It is hardly a surprise that the US Fed would respond to lower growth and inflation prospects with easier policy. However, while bond markets are correctly in our view discounting lower prospective interest rates, equity investors should also factor in lower profits expectations for 2019 as the effects of the trade war bite. It also makes us uneasy from a longer-term perspective to see monetary policy used to counter the self-inflicted harm from an arguably sub-optimal US policy on trade.
Read more...Shifting trade politics should not be ignored
Recent failure to agree a US/China deal carries significant implications as Iran tensions rise
Following the breakdown in US/China trade negotiations earlier this month, US and Chinese actions since then point in our view to a protracted period of tariffs. While Trump has placed additional tariffs on Chinese goods, China has allowed the renminbi to depreciate markedly since May 10. Furthermore, Trump’s announcement of restrictions on telecoms suppliers, aimed indirectly at Huawei, indicates the probability of a trade deal in the short-term is remote. We note forecast earnings momentum is easing again after improving earlier in the year and cyclical sector PMIs are under pressure. As tensions in respect of Iran continue to rise, it remains a good time to re-appraise risk levels in portfolios in our view.
Read more...A risk-on environment is a good time to take risk off
Equity valuations, credit spreads and volatility all point to a tactical reduction in portfolio risk
Author: Alastair George
It has been quite a ride to the upside in global markets in 2019 to date. The swings in sentiment since October 2018 have been extreme, creating a significant late-cycle trading opportunity as markets bottomed during December. Earlier expectations for profits growth in 2019 were indeed over-optimistic but fears that central banks would ignore weakening economic trends were always likely to prove wide of the mark. Furthermore, US/China trade negotiations seemed to be making progress and likely to be resolved ahead of the start of any US Presidential election campaign for 2020. The cross-asset class rally in global markets may leave the consensus narrative focused on the upside but we now view the short-term bull trade as complete, following the US Fed’s confirmation that rates are on hold rather than on their way down. For the summer of 2019, we believe “main street” will be the bigger beneficiary of improving economic conditions compared to Wall Street. In addition, uncertainty has risen in respect of a resolution of the US/China trade conflict.
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