Markets were mainly directionless last week; positive noise around the trade talks between the US and China was offset by concerns that the US will re-escalate trade tensions elsewhere, notably with Europe. The second-quarter earnings season is about to kick off in the US, with earnings in the S&P 500 expected to fall about 4 per cent in aggregate. It is expected to be the first year-on-year contraction in earnings since 2016.
EU leaders delayed Brexit for up to six months. The humiliating decision for Mrs May leaves the UK facing elections within six weeks for a Strasbourg parliament it intends to leave. Parliament will break for Easter until 23 April, so there is unlikely to be any significant progress in the short term. As has been the case for a while, UK assets and sterling were unmoved by the events last week as an extension to Article 50 was widely expected. What this extension does do, however, is extend the uncertainty well beyond the summer, and this will certainly continue to weigh on economic growth.
President Trump raised the prospect of heightened trade tensions with the EU earlier in the week, calling for tariffs on $11bn of EU products. This served as a timely reminder that the US trade disputes extend beyond China, and that the truce agreed between Trump and Jean-Claude Juncker last summer remains fragile, not least when the promised trade talks have not even started yet.
The IMF cut their global economic growth forecast for 2019 to 3.3 per cent, a level that would be the weakest since the 2008/9 financial crisis. The drop-off would have been even worse had consumer sentiment not held up so well. Only China and Japan saw marginal upgrades. The IMF also warned that high levels of corporate debt threaten to amplify any financial downturn and pose risks to financial stability as corporate borrowing levels make them vulnerable to anything more serious than a moderate slowdown.
The European Central Bank meeting echoed the IMF in highlighting the continued risks to the economic outlook. What the eurozone really needs in the short term is a pick-up in growth elsewhere. Successful stimulus in China would serve to boost European manufacturers, the sector of the eurozone that is struggling the most.
As the US approaches the 2020 election, Trump called on the US Federal Reserve to do more and embark on another round of quantitative easing instead of paring back their bond holdings. The minutes of the most recent Fed meeting suggested that most board members expect the first quarter weakness in growth to reverse as the year progresses, but depending on how the data develops, rates could shift in either direction.
While accommodative monetary policy is now generally accepted as a positive for risk assets, the change in tone from the central banks has also led investors to question the strength of global economic growth. Corporate earnings reports for the first quarter should provide more guidance for the remainder of 2019.
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