Markets - 03.07.2019

Monthly Pulse #07 19: Leading economic indicators have weakened further

In the wake of the intensification of the trade conflict between the USA and China, the leading economic indicators have weakened further. Despite of the reset during the G20 summit, trade war will be an ongoing concern.


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In the wake of the intensification of the trade conflict between the USA and China, the leading economic indicators have weakened further. Despite of the reset during the G20 summit, trade war will be an ongoing concern. Global growth is slowing and will remain subdued in most regions of the world in H2. Accordingly, price pressure will remain rather low, giving the central banks room for manoeuvre in monetary policy.

Both the FED and ECB have signalled that they will lower their key interest rates if necessary, in order to counteract economic uncertainty. The message from the bond markets to the centrals banks is clear: the economic outlook is not great; interest rates must go down. Although the FED kept its key rates unchanged in June, one rate cut in July has become very probable in the meantime. The option market is pricing in almost three rate cuts by the end of this year which we think is slightly exaggerated for the time being.

Looking at the macro picture, the slowdown in growth is a fact and it is not realistic to assume that the global economy will pick up speed over the summer months. Therefore, the composite index of US leading indicators stagnated in May and for the second half of the year it now signals a significant slowdown in growth. For now, within EZ, the latest ZEW survey results indicate an almost dramatic setback of the economic expectations, which have been particularly dampened by the fact that the economic engine Germany has come to a standstill. Furthermore, the Ifo-Index was published lower for the ninth time in a rowand lies as low as four and a half years ago. The industry sector is in crisis and the weak phase has increasingly grasped the service sector.

What speaks for a positive sentiment is the fact at the G20 meeting President Trump and China agreed on a trade truce, with the US refraining from imposing further tariffs and China offering to buy an unspecified large amount of US agriculture products. Negotiations on a trade agreement will resume, with no further details on the next steps. Fixed income markets performed strongly last month, with pricing in more that 80bps in rate cuts from the FED. Even if the easing measures materialize, the further downside potential for bond yields seems limited at short end maturities, additionally capping the return potential. With spreads expected to be widening near-term and government bonds likely to underperform, we see HY and EM bonds as more attractive. However, considering limited return potential we increase slightly to a neutral stance.

Equity markets love the loose monetary stance from central banks and created a festive mood. However, we see larger divergence arising between the real economy and the valuation of the equity markets. Hence, we confirm our cautious stance and remain slightly underweight but prefer quality and growth stocks.

EUR/USD should continue to range trade due to the battle of weaker currencies on both side of the Atlantic – with declining carry advantage of the USD. Gold performed strongly last month, boosted by lower yields and weaker USD. We may see higher bottom above USD 1400 in the coming weeks. Oil prices bounced again in June as supply risks increased amid rising tensions in the Middle East, which have lifted the likelihood of a tail-risk outcome. Yesterday, OPEC signaled to extend oil production cuts to keep oil prices higher.



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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