Markets - 02.04.2019

Monthly Pulse #04 19: Brexit. It is a complete mess

Despite the rather positive on-going stock markets, we are clearly facing a deteriorating economic growth with indicators worsening. Brexit and the still unsolved trade conflict between the US and China further increase insecurities. So, why are investors fairly calm these days? An Economic Outlook published by Clarus Capital Group AG.


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Despite the rather positive on-going stock markets, we are clearly facing a deteriorating economic growth with indicators worsening. Brexit and the still unsolved trade conflict between the US and China further increase insecurities. So, why are investors fairly calm these days? Did we miss something?

First things first: Brexit. It is a complete mess.The votes in the British Parliament are becoming rather a comedy show. Although they all were rejected, the results of the individual votes differed considerably. The proposal of a permanent custom union with the EU, which was rejected by only eight different votes, met with the most approval. The proposal for a second referendum also received a high proportion of yes votes. On the other hand, a No-Deal Brexit and the withdrawal of the resignation request were clearly rejected. It seems as if politicians are working on a second referendum behind the cur tains. Story to be continued.

In the US, growth slowed sharply in Q4 to an annual rate of 2.2 percent. There are concerns of a further deteriorating growth in Q1 this year as global weakness, fading government stimulus and rising trade tensions have taken on a toll on the economy. Economic indicators and PMI are coming under pressure although from elevated levels. All in all, the US economy is not on the bright side. Obviously, the FED is in a waiting position, but more on the central bank in the special topic section on page 3. The EZ's economy remains under pressure from weak global demand and political uncertainty, after a regional poll suggested manufacturing activity was now performing at its worst in more than five years. When you see Germany and France struggling then investors should be cautiously for European exposure. The stabilization of sentiment indicators was not confirmed in March. But we expect in H2 a slight upturn in growth.

Surprisingly, equities are still holding steady despite of the divergence between stock markets and real economy. What we have seen in the past is the phenomenon that central banks are backing up for any issue while equity markets continuing to rise. Also, today, the loose financial conditions and expecting falling interest rates are positive for equities, and likely have been responsible for the bulk of the move out of safety and into risky assets. However, we are more cautiously today and changed our stance a notch down to "neutral" for equites.

In credit, the US yield curve turned inverted for the first time since 2007. Credit Spreads retreated as well in line with the risk-on mood in equity markets. However, we would like to take the opportunity to focus more on safety than on yield and increase high-graded credit. We increase our bond allocation to neutral as well as our duration to a neutral duration.

On the currency markets, the USO offers superior interest rates and the still soft global growth backdrop is supportive due to its role as a safe haven currency. Since the market is heavily short EUR/USO, there might be upside surprises in the coming weeks. Gold should trade sideways due to the stronger USO unless any turmoil occurs. Oil price increased lately but we do not see a rally from here. The softness in the global economy as well as the ability of US oil producers to ramp up production when prices spike are just a few reasons keeping oil in check.



Disclaimer
This document has been prepared by Clarus Capital Group AG ("Clarus Capital"). This document and the information contained herein are provided solely for information and marketing purposes. It is not to be regarded as investment research, sales prospectus, an offer or a solicitation of an offer to enter in any investment activity or contractual relation. Please note that Clarus Capital retains the right to change the range of services, the products and the prices at any time without notice and that all information and opinions contained herein are subject to change. This document is not a complete statement of the markets and developments referred to herein. Past performance and forecasts are not a reliable indicator of future performance. Investment decisions should always be taken in a portfolio context and make allowance for your personal situation and consequent risk appetite and risk tolerance. This document and the products and services described herein are generic in nature and do not consider specific investment objectives, financial situation or particular needs of any specific recipient. Investors should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Individual client accounts may vary. Investing in any security involves certain risks called non-diversifiable risk. These risks may include market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies. Clarus Capital does not provide legal or tax advice and makes no representations as to the tax treatment of assets or the investment returns thereon, either in general or with reference to specific client's circumstances and needs. Recipients should obtain independent legal and tax advice on the implications of the products and services in the respective jurisdiction before investing. Certain services and products are subject to legal provisions and cannot be offered world-wide on an unrestricted basis. In particular, this document is not intended for distribution in jurisdictions where its distribution by Clarus Capital would be restricted. Clarus Capital specifically prohibits the redistribution of this document in whole or in part without the written permission of Clarus Capital and Clarus Capital accepts no liability whatsoever for the actions of third parties in this respect. Neither Clarus Capital nor any of its partners, employees or finders accepts any liability for any loss or damage arising out of the use of all or any part of this document. Source of all information is Clarus Capital unless otherwise stated. Clarus Capital makes no representation or warranty relating to any information herein which is derived from independent sources. Please consult your client advisor if you have any questions.



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