The CIO office’s view of the week ahead.A new list of US tariffs was unveiled last week. These tariffs, which could be implemented in September, will undoubtedly trigger countermeasures by the Chinese. But markets chose to look past these tensions to a US economy that still appears robust. Consumer and corporate confidence remain high and Q2 GDP growth is likely to be in the vicinity of 4%. In spite of an increasingly tight labour market, underlying inflation remains tame, while the US economy should be able to deal with a gradually less accommodative Fed. Last week, market participants started to turn their attention to quarterly results, with the first slew greeted positively. We expect earnings growth to continue to support markets in the near term.However, while trade deals could well
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Aurelien Charton considers the following as important: Investment review, Macroview, market outlook, Market review, Weekly View
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The CIO office’s view of the week ahead.
A new list of US tariffs was unveiled last week. These tariffs, which could be implemented in September, will undoubtedly trigger countermeasures by the Chinese. But markets chose to look past these tensions to a US economy that still appears robust. Consumer and corporate confidence remain high and Q2 GDP growth is likely to be in the vicinity of 4%. In spite of an increasingly tight labour market, underlying inflation remains tame, while the US economy should be able to deal with a gradually less accommodative Fed. Last week, market participants started to turn their attention to quarterly results, with the first slew greeted positively. We expect earnings growth to continue to support markets in the near term.
However, while trade deals could well be struck, coming up to the November mid-term elections we believe there is a rising risk of a full-blown trade war that could cost China around 0.5 percentage points and the US about 0.3 percentage points of GDP based on the tariffs already introduced and those newly threatened. A separate dispute with the Europeans is also steadily moving up the agenda. These opposing forces (trade concerns versus sound fundamentals) mean we are maintaining a tactically neutral stance on equities for the moment. Another source of tension could be oil prices. We believe the supply cushion will remain very tight over the summer, in spite of the announcement of a resumption of supply from Libya last week. The relentless tightening of government bond yield spreads also merits attention as it continues to signal a lack of confidence in longer-term prospects. But the jury is still out on the pertinence of yield-curve differentials after the massive central bank interventions of the past 10 years.
Reassuringly, the volume of put versus call options on the 10-year Treasury shows the market expects lower, not higher, yields, meaning the kind of complacency that led to a severe market sell-off at the start of this year is absent. Helping set the tone this week for bonds (and the US dollar) will be Fed chair Jerome Powell’s testimony before Congress. We expect him to deliver a pretty upbeat report.
Aurélien Charton, Portfolio Manager, Pictet Wealth Management CIO Office