Market Insights – December 10th, 2018

Our experts share their market views with you.

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US economic activity remained robust in November. The ISM Manufacturing and Services Indexes were both up versus October and exceeded economists’ expectations. They remain at record levels, which rules out the possibility of a recession in the USA over the next 12 months.

Opec and Russia agreed to cut oil production by 1.2 million barrels a day by January in order to bring supply in line with demand. This should stabilise oil prices in the short term. But we will wait for US inventories to decline before adopting a more constructive stance on this commodity.

Japan’s Q3 GDP has been revised down, with a worse-than-expected quarter-on-quarter contraction of 0.6%. This slide was in part driven by a series of natural disasters – including typhoons and an earthquake – although recent economic indicators already point to an uptick in growth in Q4.

Christmas support?

Investors are still in the doldrums – 2018 looks set to be one of the toughest years when it comes to asset allocation, since most financial assets are in negative territory. Long-term European sovereigns are the only saving grace. Lower-quality bonds have underperformed considerably and lost ground over the year. The same is true of emerging-market debt, gold, most commodities and real-estate funds. Not to mention the stock markets, many of which are well in the red. There was a recent surge in optimism, sparked by the Fed’s more moderate tone and the postponing of the next round of import tariffs, but it didn’t last long. The arrest of the CFO of a Chinese telecoms giant served as a reminder that the hatchet has  not been buried in the trade war between the world’s two economic superpowers. For a long time, Wall Street managed to hold off the bear that devoured other global stock markets. But since early autumn, the US stock market has fallen prey to uncertainty and experienced heightened volatility. Last week, for instance, it lost more than 4%, wiping out the previous week’s gains. Yet most indicators point to robust economic growth in the USA. Despite the stock market’s recent disappointments, economic agents remain very confident – consumers, in particular, haven’t been this optimistic about the future for more than 20 years. This confidence is supported by a very buoyant labour market. Although the figure was slightly below expectations, more than 150,000 new jobs were created in the USA in November, continuing the up-
trend that has lasted since 2010. And while the rise in hourly wages remains moderate (3.1% year over year), it is still helping to boost consumer confidence, especially since households have seen their gasoline spending drop considerably as oil prices plunge. These indicators should stop the downward spiral on Wall Street and help to lift investor confidence up from rock bottom. If recent S&P 500 support levels are confirmed (2,600 in October and 2,530 in February), it would be a first step towards narrowing the huge gap between strong US economic data and the disappointing performance recorded by Wall Street and other global stock markets.

Europe: Is an end-of-year rally still possible?

After the Greek crisis, the migrant crisis and the Brexit vote, it would be no exaggeration to say that Europe has had its fair share of tough times. But over the last few months, political uncertainties have returned in Italy, the UK and, most recently, France and Germany. Angela Merkel, who has shown great political leadership in Europe and internationally, announced that she won’t seek a fifth term in office. On the European front, she was supposed to hand things over to Emmanuel Macron. But he, too, is in a sticky position – his approval ratings have plummeted since he brought in unpopular reforms in an attempt to revive France’s sluggish economy. While companies are doing well in the current climate, French consumers have seen their purchasing power diminish. What’s more, social inequalities have become too marked and are undermining the country’s political and social stability.  The “yellow vest” protests clearly demonstrate just what dire straits France is in. It is therefore still extremely difficult – if not impossible – for the country to begin tackling its excessive public spending.

These developments have led to massive fund outflows in Europe this year. Sentiment is so bearish that we think a relief rally may still be possible.


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