Markets - 06.08.2019

Monthly Pulse #08 19: FED cuts interest rates for the first time since December 2008 by 25 basis points

Markets expected more of a dovish stance in terms of the Forward Guidance though and took Powell’s statement as somewhat hawkish. The question will however remain: was this an insurance cut or rather a beginning of an easing cycle?


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Looking at the big picture, we stick to our view that trade disputes and geopolitical tensions remain the key drivers.for the global economy and markets. Trade tension have already caused global growth to slow and we expect further fallout that may weaken domestic spending. These days central banks have been quick to pivot to more dovish stances. This indicates they are ready to provide more stimulus to reduce downside risks, even though it is not clear that monetary policy stimulus can effectively offset the US protectionism.

Meanwhile the US economy is still resilient, and it does not look that a US recession is around the corner. However, market sentiments could change quickly which would weigh on global growth. Even if monetary policy and fiscal policy support helps extend the life of the cycle, we could still face the prospect of slower growth and higher inflation. Increasing macro uncertainty could also herald a shift to a new regime of more frequent risk asset sell-offs and higher market volatility. Therefore, we believe that that building portfolio resilience is critical as this cycle continues to age.

In Europe, the economy is still struggling with lacking inflation.Hence, the ECB will provide additional stimulus in form of a shift in forward guidance, lower rates or restarting of QE – all these ahead of the end of President Draghi’s term. Our main scenario is a deposit rate cut by 10 bp in September and a resumption of some sort of asset purchases. However, it is still doubtful if such measures are enough to spur the inflation, credit lending and ultimately growth in the Eurozone. Unfortunately, we have seen several times in the past that the ECB is not making any headway here.

Fixed income yields have lately fallen, driven by the decline in government bond yields and tightening yield spreads. However, if you look at easing measures by the central banks, the further downside potential for yields seems limited at mid to long end maturities – capping the return potential as well. We remain neutral and prefer short duration credit risk and exposure to capital structure with a tilt to EM debt.

Equity markets are attractive from the momentum point of view. European stocks look modestly overpriced versus the macro backdrop. However, the dovish shift by the ECB should provide an offset to a certain extent. However, we are still cautious and remain slightly underweight on global equities even despite of the prospect of an extended cycle. The geopolitical risks and trade tensions can shift quickly with increasing volatility and eventually stronger market slumps.

With the ECB becoming dovish again and the EZ economy continuing to be sluggish, the EUR/USD tends to stay under pressure. Additionally, the carry trade is still in favour of the USD with stronger labour data in the US. Gold has broken major resistances on the back of lower USD yields and softer USD. We continue to keep gold as a good portfolio diversifier but would dissuade from chasing the rally tactically as the trade looks crowed and particularly sensitive to FED policies. Oil bounced back lately as supply risks increased amid rising tensions in the Middle East. Analysts however consider a fair price of mid-60s for coming months.



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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