Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Equities edge higher as Brent crude stress eases
Peter Garnry
Chief Investment Strategist
Summary: Global equities are higher as investors are less worried about the coronavirus with Brent crude sending bullish signals as the world prepares for China to slowly resume manufacturing. The US Chemical Actitivity Barometer Index reached a new all-time high in January as growth accelerated in a sign that the US manufacturing sector is betting on growth ahead. In today's equity update we also look at European banks and Q4 earnings.
The last two sessions in global equities have been driven by a consensus narrative that the mid-term impact from the Chinese coronavirus will be limited as China is expected to slowly allow manufacturing sector to begin operating again. Brent crude is sending a firm signal today that the worst might be behind commodity markets as the oil price pushes above $55/brl again. In global equity markets we observe emerging market equities, private equity firms and European small caps leading the gains.
Before the coronavirus was on everybody’s lips the dominating theme in financial markets was reflation and food inflation is still running high so if coronavirus impact is on the decline then the reflation could quickly come back. The US Chemical Activity Barometer Index reached a new all-time high in January with the best growth rate observed in more than a year in a sign that the US manufacturing sector is gearing up for growth ahead as the growth slowdown that lasted for almost two years is coming to an end. This would fit with OECD’s leading indicators that suggest the global economy is in a recovery phase.
Besides human and economic pain in China the coronavirus has one side effect that the market is taking not off and that is massive stimulus coming from the world’s largest economy. This will add to already accommodative monetary policies in the other major economies and in general expanding fiscal deficits. In the case the coronavirus is not worsening the 2020 reflation theme could come back quickly. A key market to watch here is long-dated bonds which will react fast to a shift in narrative.
One of the surprising parts of the equity market in February has been European banks that were underperforming European equities in general. On the back of better than expected earnings and additional cost-cutting exercises European banks are up 7.5% in February and with ECB President Lagarde’s signal that the ECB is constrained on further rate cuts our view is that we could finally have seen the bottom in European banks. A potential long-term catalyst for European banks is Europe’s “green deal” with massive government-led investments in green technology which will create lending demand with some downside protection. Europe’s “green deal” could become an indirectly government subsidy and growth enabler for European banks. We urge investors to have European banks on their watchlists.
Among companies reporting earnings we got a positive surprise from French luxury maker Kering that has Gucci as its biggest brand that crushed estimates despite Hong Kong sales slump and uncertainty over Chinese sales due to coronavirus. Before US equity markets open for trading Shopify will report Q4 earnings with extremely high expectations as Shopify has some of the most aggressive valuations we have observe over the past 10 years with an EV-to-sales ratio of 39x.
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