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Market Insights – 11st November 2019

Each week, a team of experts shares its market views with you.

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Piguet Galland Banque Finance Marché

Essentials

The S&P 500 has risen for five weeks in a row and is long overdue a consolidation. Volatility has been extremely low recently, which suggests the market is overbought in the short term. A break in this uptrend would be welcome and would not prevent the year-end rally, which we think will be spurred by the brightening economic fundamentals and easing geopolitical tensions.

Gold has come under pressure and dropped back below USD 1,500/ounce. This dip makes sense, given that risk assets have performed well and interest rates are on the rise again.

Unsurprisingly, the Socialists came out on top in Spain’s elections, but they once again failed to win the majority needed to form a new government. They will face increasing pressure to reach a compromise, although that is likely to take time. Despite the deadlock, Spain’s economy should grow by more than 2% in 2019, which is well above the eurozone’s average. 

 

The SNB is keeping everyone in suspense

The Swiss National Bank’s policy is crystal clear. Its main objective, like that of other major central banks, is to keep inflation stable and slightly positive and to promote long-term growth in order to boost employment. And in recent years, the Swiss franc has also become a crucial issue. Switzerland’s trade and fiscal surpluses, combined with its low sovereign debt levels and its political stability, have brought capital into the country and pushed the franc up against other, less-appealing currencies. But the franc’s strength could upset Switzerland’s fragile balance now that trade tensions have started to weigh on global growth. The Swiss economy is strongly export-oriented, and a sharp rise in the franc could mean that the country loses out on its share of the international market and result in disinflation on imported products.

That’s why the SNB wants to stabilise the Swiss franc, especially against the euro. The European Union is still Switzerland’s main trading partner, accounting for 60% of trade, with Germany alone representing 22%. What’s more, we buy more from the EU than we sell to it. That deficit has grown recently – a sign that the strong franc is hurting Swiss exporters. The SNB is focused on the euro, but it needs to ensure it keeps an eye on other currencies as well. Trade with other countries is increasing, with China representing 6% of exports and the USA 12%. But it’s difficult to rein in the franc and remain under the Trump administration’s radar, given that Switzerland has a huge trade surplus with the USA. Putting off speculators without angering trade partners can be a tricky square to circle. That’s why the SNB has to stop the franc from rising by occasionally intervening on the forex market and threatening to cut interest rates further. This can cause problems inside the country. Helping manufacturers and other exporters means harming the finance sector and pension funds by slamming them with negative interest rates. We can hope that the recent tension on CHF-denominated long-term interest rates is a sign that things will start to return to normal, but we may be disappointed.

The expectations of a deal

There have been many false starts since the trade talks began. But as we have mentioned previously, the concessions agreed by the United States might now need to be more extensive than expected, as reflected in last week’s rumors of a tariff rollback. If it takes place, the Democrats will no doubt complain that Trump went too easy on China. However, at less than a year before the 2020 elections, the US president will likely put the health of the US economy – and his chances of re-election – before anything else.

China has managed to draw out the talks for more than a year. Meanwhile, it has started to relocate some of its tech production back to China so that it reduces its reliance on the USA. This has helped to drive up investments in semiconductor equipment around the world. One clear sign of this is the recent rebound in the Japanese market, which alongside the yen, is highly sensitive to global trade.

But whatever the outcome of the talks in the short term, the United States and China are far from burying the hatchet. Their differences of opinion run deep, and it will be hard to build bridges in an increasingly protectionist world. After all, politicians, consumers and business leaders might not be willing to make much more sacrifices. Ultimately, companies will have to go back to business as usual and learn to cope with the uncertainty caused by the trade tensions. At this point, market expectations of a deal to be reached still seem reasonable to us, the reason for which we increased our exposure to equities – and especially Asian markets – back in October.

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