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.



Disclaimer
This document has been prepared by Clarus Capital Group AG ("Clarus Capital"). This document and the information contained herein are provided solely for information and marketing purposes. It is not to be regarded as investment research, sales prospectus, an offer or a solicitation of an offer to enter in any investment activity or contractual relation. Please note that Clarus Capital retains the right to change the range of services, the products and the prices at any time without notice and that all information and opinions contained herein are subject to change. This document is not a complete statement of the markets and developments referred to herein. Past performance and forecasts are not a reliable indicator of future performance. Investment decisions should always be taken in a portfolio context and make allowance for your personal situation and consequent risk appetite and risk tolerance. This document and the products and services described herein are generic in nature and do not consider specific investment objectives, financial situation or particular needs of any specific recipient. Investors should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Individual client accounts may vary. Investing in any security involves certain risks called non-diversifiable risk. These risks may include market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies. Clarus Capital does not provide legal or tax advice and makes no representations as to the tax treatment of assets or the investment returns thereon, either in general or with reference to specific client's circumstances and needs. Recipients should obtain independent legal and tax advice on the implications of the products and services in the respective jurisdiction before investing. Certain services and products are subject to legal provisions and cannot be offered world-wide on an unrestricted basis. In particular, this document is not intended for distribution in jurisdictions where its distribution by Clarus Capital would be restricted. Clarus Capital specifically prohibits the redistribution of this document in whole or in part without the written permission of Clarus Capital and Clarus Capital accepts no liability whatsoever for the actions of third parties in this respect. Neither Clarus Capital nor any of its partners, employees or finders accepts any liability for any loss or damage arising out of the use of all or any part of this document. Source of all information is Clarus Capital unless otherwise stated. Clarus Capital makes no representation or warranty relating to any information herein which is derived from independent sources. Please consult your client advisor if you have any questions.



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