(Vir)alteration of investor optimism

Financial markets staged a strong start to the new year, propelled by the ‘phase one’ US/China trade agreement. And yet, a new spectre has caught the markets. The confirmation of human-to-human transmission of the Coronavirus on Jan. 20 and a first US case a day later caused risk sell-off in the second half of January.

Highlights:

  • Just as the trade truce provided broad-based relief, the Coronavirus is unsettling global markets.
  • The fast-spreading disease is challenging the tender global macro green shoots, but we still see resilience in US and EA domestic demand.
  • Experience from past episodes suggests that markets tend to overshoot, but rebound sharply once the number of new infections starts to slow.
  • Even before the Coronavirus, we had embraced a slightly more cautious stance on early signs of investor complacency. We maintain a (smaller) prorisk tilt in the portfolios, but reduce overweights in Equities and HY Credit. We keep our overweight in IG corporates and underweight in core bonds.

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(VIR)ALTERATION OF
INVESTOR OPTIMISM

RELATED INSIGHTS

TAKING MONETARY POLICY TO YET ANOTHER LEVEL
The presentation of the new Long Term goal and strategy on August 27 marks a deep shift in the Fed’s monetary policy. The new way inflation and the labour market will affect monetary policy will result in a marked downward bias to interest rates.
HEADWINDS FOR A BREXIT TRADE DEAL ARE RISING
Yesterday, a UK government fresh legislation proposal – the Internal Market Bill - led to heated discussions in the House of Commons. According to the UK government, the bill is intended to guarantee the smooth functioning of trade and prevent disruptions between the four nations of the UK, if no deal is reached with the EU by the end of this year’s transition period.
Q2 EARNINGS END ABOVE CONSENSUS, WITH THE US LEADING. EXPECT BETTER GROWTH AHEAD
Compared to our latest - positive - comment on the 20th of July, the yearly earnings growth of the median sector has improved both in the US and Japan, while the picture is less clear in Europe. Earnings surprises have also increased. On the contrary, reported sales growth and sales surprises have worsened since then.