Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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The US-China trade talks yo-yo spins again
Peter Garnry
Chief Investment Strategist
Summary: The trade talks between the US and China are a constant yo-yo going back and forth with conflicting statements from both sides. Trump is now expected to sign the Hong Kong bill that says that the US should revise Hong Kong's special status every year. Despite this definitely being cold water on the trade negotiations the Chinese chief trade negotiator said he is "cautiously optimistic". In today's equity update we also take a look at the rapidly declining growth in the US economy and Google's decision to constrain political advertising putting pressure on Facebook to make a similar move.
Risk-off accelerated yesterday as news broke that Trump is expected to sign the Hong Kong bill despite China threatening it would negatively impact the trade negotiations. S&P 500 futures nosedived 0.8% on the news but has since recovered half of the retreat. But the negative sentiment spilled over into Asia and Europe in today’s session with South Korean equities down 1.3%. The usual trade talks yo-yo started shortly after the sell-off with China’s chief trade negotiator saying he was “cautiously optimistic” but also confused about the US position on the trade deal. The next big risk event for equities is the December 15 when the US will decide whether to additional tariffs on Chinese goods.
Outside the volatility surrounding the US-China trade talks the NYFed Q4 GDP Nowcast is plunging lower towards zero growth ending last Friday at 0.4% growth down from 2% in late September. This is sharp decline in expected economic activity and indicates that the Fed is behind the curve again and that Fed Funds futures are not correctly pricing in the need for more easing. Our view is that the Fed will be forced to ease further as economic activity will continue to slow down as the US-China conflicts creates increasing uncertainty for companies holding back on employment and investments.
Another warning shot this week has been South Korean equities down 3.1% for the week showing that positive narrative in Asia remains fragile to trade talks headlines and macro figures. Later today the US Conference Board Leading Indicators for October will be released, and expectations are for another decline m/m potentially taking the index in its first negative y/y print since 2009. Depending on the next couple of weeks’ trade headlines and macro the “Santa rally” could easily be derailed.
Twitter was the first social media company to remove the option for advertisers to run political ads on its platform. The decision added pressure on the two online advertising giants Google and Facebook. The Trump campaign was using social media in a very effective way during the 2016 election and has incentives to keep status quo. According to Bloomberg, Trump campaign officials have pressured Facebook to maintain its permissive political advertising rules. But yesterday Google announced that it will can candidates from targeting election ads based on people’s political affiliation although targeted messages can still be directed based on gender, age and geography. So not as prohibitive as Twitter, but still more constrained than Facebook. According to Facebook’s own numbers political advertising revenue is expected to be 0.5% if revenue in 2020, but that number excludes revenue from PAC (political action committee) ads. But the ball is now surely on Facebook and further constraints on political advertising is not good for the Trump campaign which heavily uses advertising on Facebook.
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