A worldwide slowdown in growth has prompted central banks to revert to stimulus. The Fed has returned to balance sheet expansion in the face of weaker economic numbers and intermittent market liquidity shortages. This should support stock markets which anyway stand to get a boost from the current earnings season.
The global economy continues to slow
The IMF has now cut its 2019 growth projection for the world economy to just 3%. If realized, this would be the lowest outturn since 2009. Signs are mounting that the phase of decelerating growth is set to continue.
Chinese growth disappoints
The Chinese economy only grew by 6% in Q3 (compared with 6.2% in Q2). The Q3 report marks the weakest result in 26 years.
The Bundesbank thinks Germany is already in recession
The German economy had already contracted slightly (by 0.1%) in Q2 and we expect a further contraction will be reported for Q3. This would imply that Germany is already in a mild recession.
Weak Eurozone Purchasing Manager index data
The Purchasing Manager indices for the Eurozone continue to disappoint. October’s figure for Manufacturing was just 45.7 against an expected 46. The result for Services at 51.8 was slightly shy of the expected 51.9. Thus, the overall reading for October at 50.2 was below the expected 50.3
President Trump and Chinese Vice-President Wang Qishan suggest that trade talks are going well
Yet again the US Administration has sought to influence investor expectations with the suggestion that a first trade agreement between the US and China could be signed at the upcoming APEC summit. One can well imagine that at the present time neither China nor the US wish to see an intensification of their trade conflict. But this by means implies that the ideological differences between the two countries have become less acute. We note also that US-European trade hostility has already claimed its first victims.
Sacrificial victims of the US trade campaign against Europe: Parmesan and Gorgonzola
Future US imports of Parmesan and Gorgonzola are likely to be so highly taxed that Italian producers suggest sales might fall 20%. Some euro 500 million worth of Italian food exports to the US will be subject to the higher tariffs imposed by President Trump (supposedly in response to EU Airbus subsidies). Not only European cars, but also Italian cheeses are deemed a threat to US national security.
The faltering global economy has caused a central bank panic – bringing more “financial repression” and booming stock markets
It’s becoming ever harder for central banks to “surprise” with unexpected measures of stimulus. Their policy initiatives have less and less impact on the real economy. Rather the impact continues to be on the financial markets – booming equity and property markets and ever lower bond yields. Extreme low interest rate policies mean firms are largely free to take on massive amounts of debt which they can then use to buy back their own equity. Bad news for the economy means good news for stock markets so long as investors can continue to believe that central banks will respond to economic weakness with stimulus and that such economic weakness as does develop will not be so acute as to lead to massive bankruptcies or to widespread investor anxiety on this score. But monetary stimulus in today’s world needs be unexpectedly daring as markets have already ”priced in” less extreme policy responses, thus rendering them largely ineffective. Hence, the Fed has restarted QE. Money market turbulence, which had intermittently led to acute liquidity shortages, has prompted the Fed move to repurchase around $60bn of US Treasuries a month. This substantial injection of liquidity should boost the equity markets and lead to a steeper yield curve. The Fed’s previous QE operations led to a widening of the interest rate spread between 10-year Treasuries and 3-month Treasury bills of around 130 basis points. The greater requirement for deficit finance on the part of America’s Federal government also suggests ongoing support for QE and a steeper yield curve. The more liquidity is injected the lower the chance that entities dependent on further borrowing will fail to access the finance they need. So, system risk, which repo rates at around 10% a few weeks ago were suggesting was high, has been reduced. (The repo rate is the interest rate implied by the sale and future repurchase arrangements for long-term assets). The ECB is also injecting liquidity into the markets through the expansion of its balance sheet. Our assessment is that these central bank measures of stimulus will in the short-term have some impact in offsetting the trend deceleration in global growth.
Yet again, Brexit looks like being delayed…
……and this saga is becoming ever more tedious. Westminster has decided not to accept Boris Johnson’s 3-day timetable for its acceptance of the new UK-EU withdrawal agreement. While we still do not expect a chaotic UK crash out of the EU, it is almost impossible to say how the Brexit story will develop. That said, the chances of another UK general election in the not distant future seem high.
The latest US corporate earnings season is going well
Despite weak macroeconomic data, US companies are generally reporting better results for Q3 than investors had been expecting.
The next US Presidential election is just a year away
According to the latest opinion polls Elizabeth Warren has been able to increase slightly her lead over Joe Biden and Bernie Sanders in the race to secure the Democrat party nomination for the US presidential election in November 2020. Mrs. Warren wants to break up tech giants such as Amazon and Facebook, and so is viewed as potentially very bad news for the Nasdaq. Beyond this, she strongly favors universal health care and has ambitious and expensive plans to reform US education (including student debt forgiveness, universal childcare, increased access to public colleges and much more spending on public schools). Her education program would be largely funded by a special tax on the super-rich. Households affected would pay an annual 2% tax on net assets in excess of $50 million (and 3% on net assets above $1bn.) Estimates suggest that the tax income from the 75’000 households involved would deliver $2750bn. to Federal coffers over 10 years. In other fields, Mrs. Warren also wants a return to the principles of the Glass Steagall act, breaking up big banks, so as to separate commercial banking from investment banking businesses. She would also push for a rapid move away from fossil fuel consumption, with fracking being largely discontinued, and a federal minimum wage set at $15 an hour.
Contact: Thomas Härter, CIO, Investment Office
Telephone: +41 58 680 60 44
Disclaimer: Produced by Investment Center Aquila Ltd. Information and opinions contained in this document are gathered and derived from sources which we believe to be reliable. However, we can offer no under-taking, representation or guarantee, either expressly or implicitly, as to the reliability, completeness or correctness of these sources and the information pro-vided. All information is provided without any guarantees and without any explicit or tacit warranties. Information and opinions contained in this document are for information purposes only and shall not be construed as an offer, recommendation or solicitation to acquire or dispose of any investment instrument or to engage in any other trans action. Interested investors are strongly advised to consult with their Investment Adviser prior to taking any investment decision on the basis of this document in order to discuss and take into account their investment goals, financial situation, individual needs and constraints, risk profile and other information. We accept no liability for the accuracy, correctness and completeness of the information and opinions provided. To the extent permitted by law, we exclude all liability for direct, indirect or consequential damages, including loss of profit, arising from the published information.
In the latest Aquila Focus, Nicolas Peter, Head of Banking & Investments, discusses the continuing rally in US tech stocks and the lack of an interest rate cut in the USA for the time being.
#aquila focus #interest #techrally #eam #aquilaag
In 2023, numerous geopolitical risks came to the fore, supplemented by interest rate hikes by central banks in the fight against inflation. The conflict in Ukraine will soon last two years. In addition, the situation in the Middle East has worsened, particularly between Israel and Hamas. An escalation of the conflict to neighboring Arab countries has been prevented so far. Economic weaknesses are also evident in two of Switzerland's key trading partners: China and Germany. These developments are leading to a lack of important impetus from foreign trade. Geopolitical issues will continue to play an important role in the coming year. However, the past has shown that the impact of such events on the global financial markets is often short-lived.
Fewer sustainability investments, but more investments in pharmaceutical companies and the healthcare sector. Artificial intelligence en masse, but shares instead of gold. These are some of the resolutions of independent asset managers in Switzerland for the first quarter of 2024, according to the latest AVI Index.
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