Market Insights – July 23rd, 2018

Weekly financial & economic analysis.

Läuferin bei Sonnenaufgang in einer Stadt

Essentials

First Ms May’s foreign secretary resigned and then the prime minister managed to upset the pro-European wing of her party. Although there is some risk of a vote of no confidence, May should be able to get the support she needs to meet the Brexit deadlines. Sterling could rally once the uncertainties have faded.

A whopping 94% of US companies have reported above-forecast earnings so far this season. While it’s true that only 17% of S&P 500 companies have released their results, Q2 is shaping up to be a good quarter, with EPS expected to rise by more than 22%.

Swiss equities have rallied by almost 6% since their June dip as investors show renewed interest in defensive large caps and the early quarterly earnings releases are promising. But if stock-market indexes are to break through current resistance levels, this string of solid earnings results will have to continue.

Talk about politically incorrect!

President Trump seems to like creating a buzz, getting media attention and stealing the limelight – it’s what he does every day of every week. When it comes to international relations, he keeps blowing hot and cold and appears intent on turning the world order on its head. With Trump, what seemed politically impossible has become run of the mill, with long-standing allies left by the wayside and erstwhile pariahs now considered acceptable. Hindsight will surely give us a better idea of what the long-term objective of all his shenanigans actually is. If Trump is looking to leave his mark on history, his work is probably already done, given just how different his presidential style is to that of his predecessors. But while he arouses much disapproval outside the USA, he still garners a lot of support at home. His “America first” slogan continues to appeal to large swathes of the population that were hit hard by the 2008 subprime and financial crisis and have since struggled to reap the benefits of one of the longest periods of economic expansion in US history. The country’s economy is notching up records, especially when it comes to the labour market. Weekly jobless claims have fallen to their lowest level since 1969, when another slogan – “Amercia’s first on the moon” – was on people’s lips. Q2 GDP growth figures are likely to be through the roof, and most US economic indicators are still pointing upwards as the summer unfolds. It’s not just the USA that is experiencing an improvement in its economic climate, as seen by the sharp upturn in the Citigroup global Economic Surprise Index. For the time being, the financial markets are torn between political risks – especially the risk that the White House will start a trade war – and the current solid health of the global economy. Unlike other financial markets, the US stock market has adopted a bullish attitude and is heading for new highs. The Nasdaq has already hit a new record, boosted by soaring tech stocks. While equities remain the most attractive financial asset, it’s worth remembering that at this late stage in the macro cycle, they are subject to greater volatility and could be pulled temporarily downwards by an announcement or a tweet.

Could this earnings season provide the next boost for Europe?

Q2 saw the return of political uncertainties in Europe, mainly because of the migrant crisis, which led to a eurosceptic government being formed in Italy and weakened Chancellor Merkel. The other factor that has upset the global economy is the prospect of a trade war between the USA and its main trading partners. These developments have sparked a rise in the risk premium on European stock markets and dampened investor sentiment. Investors have returned to “safe” asset classes like government bonds and defensive stocks and moved away from cyclicals and financials. On a more encouraging note, however, the economy remains on a firm footing and companies are in good health. And the earnings season that recently got under way should be a good one, thanks to the softer euro. Market valuations are not very high in his

torical terms, and investor sentiment has deteriorated sharply. But once the focus shifts back to the economy’s solid fundamentals, some attractive entry points will arise. Within the eurozone, we are bullish on Spain, where growth should remain above average, and on France, which should be boosted by the reforms put in place by Macron’s government. We underweight the German market, which remains overbought.

To go deeper

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