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Market Insights – February 17th, 2020

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

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Essentials

Last week’s indicators showed that US consumer spending is still moving upwards. Retail sales rose by a steady 0.3% in January, while various consumer confidence indexes also gained ground. US consumers will no doubt continue to drive GDP growth in 2020 as their purchasing power soars.

The Japanese economy contracted 6.3% in Q4 2019, shrinking at its fastest pace in five years and coming in well below expectations. This was primarily because of the sales tax hike in October, which, when combined with the knock-on effects of the coronavirus outbreak, could push Japan into recession.

The euro dropped further against the US dollar on the back of lacklustre economic newsflow from the region. Industrial output fell sharply in December, weighed down by the 3.5% decline in production in Germany, where the manufacturing sector is still under pressure. But the recent uptick in leading economic indicators like the PMI suggests that the economic climate should improve. 

The fever has gone down

Coronavirus continues to spread. It has now far outstripped the 2003 SARS outbreak in terms of the number of people infected and the number of deaths. So far, it has mainly affected China, with less than 1% of reported cases occurring outside the country. Beijing has brought in drastic containment measures to try and limit the spread of the infection in Hubei province, and especially in the provincial capital Wuhan. The city is a major transport hub and home to numerous factories that are important for China’s manufacturing sector. If the isolation measures remain in place for much longer, the impact on China’s economic growth will be severe. Yet after an initial bout of weakness, the world’s stock markets have calmed down again. As we forecast at the end of January, investors quickly decided that the outbreak would be short-lived once the peak had been reached. The daily drop in the number of new cases suggests that we are right to be optimistic. We will nevertheless keep an eye on that figure and the mortality rate, which currently stands at around 2% of cases, before we consider the outbreak to be firmly under control. In the meantime, market sentiment has clearly improved. Asian stock markets have made up all of their losses, European markets show positive performances since the start of the year, and the Swiss exchange and Wall Street have hit new record highs. Stock markets are being buoyed by favourable monetary conditions. The coronavirus outbreak hit commodity prices very hard, which has ruled out the risk of a surge in inflation in the medium term. This has reassured central banks, whose accommodative policies have gone on for much longer than expected. Long-term interest rates are very likely to remain low, which will make stock markets even more attractive, despite the fact that prices have risen sharply over the last year. And on the geopolitical front, the trade war has ended – at least for the time being. Investors’ attention will now quickly turn to the US presidential race. In the past, it has often been a source of uncertainty and volatility on the markets, although the chances of Trump getting re-elected increased after the failed impeachment process cost the Democrats dearly.

Commodities – attractive opportunities

Precious metals continue to perform very well despite the rising stock markets. Demand for gold has been stronger than in recent years, thanks to purchases by central banks – mainly in emerging-market countries – but also to renewed interest among private investors.  We still think that gold is the best way of protecting portfolios: it offers significant upside potential during turbulent times (such as the coronavirus outbreak or when tensions between the USA and Iran flared recently) with only a limited cost during periods of stability.

Cyclical commodities – like industrial metals, oil and even some farm commodities – have been hit hard by the outbreak in China. Production cannot adjust quickly enough to the drop in demand recorded by market operators. This has caused prices to drop to their lowest level in recent years, and they haven’t bounced back yet. As things stand, we think that growth will return to normal in the coming months. In the meantime, we could see further stimulus measures from some governments. The resulting uptick in demand will be very positive, and we think that the recent correction represents an attractive buying opportunity, especially for certain metals, like copper, that are experiencing a medium-term supply deficit.

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