Markets - 08.10.2019

Monthly Pulse #10 19: Geopolitical risks have decreased on various fronts

In recent weeks, geopolitical risks have decreased on various fronts. In the trade dispute between the US and China as well, much more conciliatory tone has been struck recently. However, it is still too early to assume that the situation will ease in the long term.


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The ECB has once again put together a stimulus package. . Its effectiveness is however increasingly being questioned. Fiscal stimuli would now be more promising to boost the European economy. On the other side of the Atlantic, the the FED lowered its key interest rate for the second time this year.For some time now, it has been pointing to the high geopolitical uncertainties that are weighing on the global economic outlook and could have a negative impact on the US economy. Hence the rates cuts are precautionary measures to counteract a potential economic downturn. Analysts expect further rate cut in October. However, the FOMC’s dot plots show no further interest rate cuts in the median for this year. Our base scenario remains for two rate cuts. The US economy is still well positioned and would have to cool down more for a further rate cut.

Nonetheless, the trade dispute is clearly taking its toll on the US industry, exports and investment. The ISM Manufacturing fell below the growth threshold of 50 points in August for the first time since 2016. The sub-component for export orders even fell to its lowest level since 2009. Contrariwise, the interest-sensitive real estate market registered record construction starts in twelve years which should lead to GDP growth in Q3.

Eurozone’s economy continues to stagnate. Company surveys and leading indicators continue to signal low growth for the coming months. The downside risks still predominate, but the high level of consumer confidence and strongest wage growth since the financial crisis speaks again a recession scenario.

Bond yields have rebounded from the August lows but remain low on an absolute basis. With central banks easing policy, government bond yields are likely to rise moderately. The spread in USD IG has remained broadly unchanged and we are biased to short duration. US HY spreads have compressed recently to a level comparable to EM hard currency bonds and therefore the global HY bonds are relatively pricey. Due to limited performance potential we remain neutral in bonds.

Equity markets should continue to perform well given the fact that central banks loosen its monetary policy – at least temporarily. The US earnings season is soon about to kick-off with expected drop in profits by 3.5% from last year’s period. We see the US equity market as the most attractive, with financials and healthcare to outperform. However, in our opinion the political outcomes and slow global growth may prevail the expectations. Hence, we remain underweight in equities.

EUR/USD USD is still at downside risk despite the improving political situations in Italy and the UK. Lots of negativity is already priced and with ECB’s accommodative policy stance, we still think 1.08 -1.10 is the range to trade until year end. Goldcorrected sharply last week as political tensions eased. However, with US real yields collapsing, gold may regain momentum if risk sentiment worsens. Oil production shortfalls in the short term will further provide upside potential assuming the demand for crude oil is developing steady.



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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