Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Searching for positive news in equities
Peter Garnry
Chief Investment Strategist
Summary: Equities are down across the board as South Korea CPI falls to 0% and the US and China cannot agree on the next date for trade negotiations. The risk-off is pulling DAX futures close to its previous tight trading range. In today's equity update we also highlight Xiaomi and Norwegian.
South Korea CPI y/y fell to 0.0% which is the lowest print on record since 1966 highlighting mounting deflationary pressures from weakening demand and over capacity. This is not a good sign. If we are not getting any positive news on the US-China trade war and the USD continues to strengthen then equity markets will find it difficult to stage an upward move. The stronger USD is killing growth on top of the supply chain disruptions for the trade war.
DAX breakout: weaker EUR or green shoots trade?
The upside breakout in DAX futures (FDXc1) that started Friday seems to be losing steam in today’s session as risk-off is dominating across markets. The news out of Asia has not helped markets and it seems the US and China have difficulties finding the date for their next trade negotiation. In other words, the US-China trade war will continue to add volatility and, on the balance, negative dynamics for markets.
DAX futures have pushed higher on the weaker EUR and yesterday there was a small hint of green shoots trade as Sweden’s PMI manufacturing figures surprised to the upside leaving room for a rebound in Germany manufacturing sector as the two countries have similar exposure profile to the global economy (heavy industry).
The next big event risk for DAX is the ECB meeting on September 12 where the market is pricing in action from the ECB with a potential restart of their QE programme. This leaves potential upside for the DAX on the table but some of it will be offset by expected FOMC rate cut on September 18. European banks are under pressure so any ECB action not taking banks into consideration will provide great opportunities to trade banking stocks.
Stocks to watch
The high profiled Chinese smartphone maker Xiaomi (01810:xhkg) is up 6% in Asia session as the company announced a $1.5bn buyback programme. But the news of buybacks is only a distraction from the real issues at hand for the company. The smartphone market in China is no longer growing and the margins are ultra-thin making it a difficult environment for Xiaomi. The stock price is 50% lower than the IPO price in July 2018 and the stock is down 36% year-to-date. Shares have traded lower over time due to uncertainty over future growth as realized growth rates have come down faster than initially expected. Although the company is profitable the valuation is still high when compared to similar technology companies.
Norwegian (NAS:xosl) shares are down 6% today following news yesterday of getting a lifeline from bondholders on two bond series. The low-cost airliner is still dealing with pricing pressures, engine issues and the grounding of Boeing’s 737 Max plane. Norwegian is putting up its flight slots at London Gatwick Airport as security for the extension. According to Bloomberg’s default risk model Norwegian is in the lower high yield category two notches above default. The model has a 5.8% 1-year default probability with the curve steepening to 11.7% within the next five-year period.
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