Market Insights – 29th of April 2019

The S&P 500 has risen almost constantly for close to four months, making up for the heavy losses suffered in Q4 2018 and reaching the all-time highs recorded early last October. Fears that the cycle was nearing an end have been replaced by measured optimism that central banks – especially those of the world’s two economic superpowers – will be able to navigate a soft landing. And everything suggests that the US and Chinese authorities are about to successfully complete this manoeuvre. The raft of monetary and fiscal stimulus measures brought in by the Chinese government in recent months has paid off. After slowing sharply in 2018, output has stabilised and looks set to pick up again. In the International Monetary Fund’s (IMF) latest forecasts, China was one of only a handful of countries that saw its growth figures for 2019 revised upwards, to 6.3%. The outlook for the USA is just as reassuring. The IMF expects growth to come in at 2.3%, one of the best scores for an industrialised country and way ahead of the levels forecast for the eurozone and Japan. US consumer spending is holding up particularly well, thanks to rock-bottom unemployment and rising wages. The lack of inflation has also reassured investors, as it means that the long-anticipated policy tightening will be put off for a while longer. Against this backdrop, corporate earnings are still faring well, particularly in the USA. The vast majority of US companies have beaten their earnings forecasts, which were slashed by analysts after the year-end stock-market slump. The outlook is therefore still bright for equities over the coming months, although the substantial gains recorded so far this year mean that a consolidation would not come as a surprise at this point. This would wipe away some of the optimism that is starting to creep in just a few months after a bout of extreme panic. This kind of consolidation would be a welcome development. An acceleration in Wall Street gains after a breakout would probably end in a new volatile episode.

Oil prices had a very good start to the year, gaining more than 30%, primarily because of robust demand and Opec’s strict implementation of the production cuts announced in late 2018. Geopolitical developments, such as the instability in Venezuela and Libya, have also weighed on supply. And last week, in a bid to further reduce Iran’s oil revenues, the USA retracted the exemptions granted last November that allowed eight countries to buy Iranian oil without fear of sanctions. As part of his drive to lower fuel prices for voters, Trump said that this decrease in supply would be offset by a production ramp-up in Saudi Arabia and the USA.

We think the balance between supply and demand is still tilted in such a way as to support oil prices in the short term. However, because of heightened political uncertainties, we expect more volatility in the coming months.

Looking further ahead, new pipelines will be opened in Texas this autumn, which will increase domestic output and secure the USA’s position as the world’s leading oil producer. As a result, we don’t think prices will top this year’s highs, at least not for any sustainable period of time.