Market Insights – March 18th, 2019

Weekly financial & economic analysis.

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Essentials

Although the retail sales figures for China released last week were in line with expectations, the rise in industrial output was slightly disappointing, coming in at 5.3% versus 5.7% in December. Meanwhile, the authorities have said that the recently announced stimulus measures (including the cut in the sales tax) will take effect in April.

Although Brexit is still an open question, sterling continues to be buoyed by the fading political risk, reaching its highest level against the euro since 2017. The votes last week limited the chances of a very disorderly exit from the European Union.

After a long string of disappointments, economic newsflow in the eurozone has brightened. The recent uptick in retail sales and industrial output beat the consensus, suggesting that the worst of the region’s slowdown is perhaps now behind us.

The temptation to exceed speed limits

Inflation is once again slowing in the USA. In February, the consumer price index was up 1.5% year over year, which is shy of the 2% target set by the Fed and well below the 2.9% recorded in July 2018. At the time, that figure prompted the Fed’s newly appointed chair to adopt a very hawkish tone. There was every reason to believe that the Fed was far from done with its rate hikes. At the helm since February 2018, Mr Powell now appears to have grasped just how difficult his job is. Targeting inflation of close to 2% over the long term is harder than it used to be. To start with, energy prices are more sensitive to economic highs and lows. On a number of occasions in recent years, oil prices have dropped or risen by several dozen dollars as a result of slight upturns and downturns in global economic growth. And the impact on transport costs, which affect an increasing proportion of consumer goods, is undeniable. Owing to the base effect, the drop in oil prices will continue to weigh on inflation figures at least until mid-summer. At the same time, disinflationary pressures continue to affect a large portion of household goods. The rapid digitisation of the economy is pushing the prices of goods and services downwards. Online shopping is increasing competition and expanding the reach of globalisation, while automation and robotisation are keeping production costs down. The lower rate of inflation in the USA will no doubt be the focus of discussions at the Fed’s meeting this week, when the Fed will probably confirm its recent change in course. Monetary-policy tightening is no longer on the cards. Instead, the task at hand will be to carefully fine-tune the economy. There is talk that the Fed might discuss lifting its inflation target above the sacrosanct 2% mark, so that there is more room for inflation to move downwards next time the economy heads south. Stock markets, which have been buoyed by Mr Powell’s more accommodative stance in recent weeks, could have more reasons to celebrate if the Fed hints that it is also ready to accept a higher rate of inflation on asset prices.

Swiss stock market pays no heed to fundamentals

Following in the footsteps of the European Central Bank (ECB), Switzerland’s State Secretariat for Economic Affairs (SECO) lowered its 2019 growth forecasts for the Swiss economy. Like the ECB, which cut its own forecast just a few days earlier, the downward revisions were brutal. Instead of 1.5% growth in Swiss GDP, we should now expect just 1.1% this year, given the more mixed outlook for Switzerland’s main trading partner, Europe. SECO even said that a sharper downturn could be on the cards if international trade deteriorates.

Swiss stock-market indexes, however, keep hitting record highs, at a time when equities in other regions of the world are struggling to return to the levels recorded last September, before the start of the market correction. As a result, valuations of domestic stocks have also soared. In other words, Swiss stocks are not just expensive but very expensive in historical terms.

Despite the gloomier growth outlook, Swiss stocks are being boosted by their defensive nature and are fulfilling their role as safe havens, especially for European investors, who are struggling to find alternative investments in the region. As long as the economic climate in neighbouring countries does not pick up sustainably, there’s a good chance that the Swiss stock market will continue to outperform despite its high valuations. 

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