The CIO office’s view of the week ahead.Last week, the US concluded a trade ‘deal’ with Mexico, although the extent of changes is limited, mostly targeting the car industry. While this is a step in the right direction, the picture is not clear-cut and could ultimately be a story of several deals. Meanwhile, this week we expect Trump’s confirmation regarding the potential for further tariffs on USD 200bn of Chinese imports, fuelling uncertainty around global trade. China’s economy is already slowing, while US growth advances, undeterred. This week the US releases August nonfarm payrolls, which will add further colour to the state of US economic health.As Italian budget negotiations ramp up, Italian spreads moved higher and Fitch Ratings last week changed its outlook for Italian debt to
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The CIO office’s view of the week ahead.
Last week, the US concluded a trade ‘deal’ with Mexico, although the extent of changes is limited, mostly targeting the car industry. While this is a step in the right direction, the picture is not clear-cut and could ultimately be a story of several deals. Meanwhile, this week we expect Trump’s confirmation regarding the potential for further tariffs on USD 200bn of Chinese imports, fuelling uncertainty around global trade. China’s economy is already slowing, while US growth advances, undeterred. This week the US releases August nonfarm payrolls, which will add further colour to the state of US economic health.
As Italian budget negotiations ramp up, Italian spreads moved higher and Fitch Ratings last week changed its outlook for Italian debt to “negative” from “stable”, while maintaining its BBB credit rating for now. These developments reinforce our bearish position on peripheral debt ahead of end October, when Italy will submit its draft 2019 budget plan to Brussels. However, despite cautious rhetoric in Europe, business confidence remains solid, as evidenced by momentum in mergers and acquisitions activity.
Emerging Market (EM) currencies have depreciated in spite of recent broad dollar weakness in recent weeks. This is atypical and due to political uncertainty in Argentina, Turkey and Brazil. EM countries with the worst current account deficits have seen their sovereign debt hit hardest, namely Turkey and Argentina. These two countries have employed two different reaction functions to cope with the sharp depreciation of their currencies, with the former refusing to raise rates while the latter has driven its policy rate sky-high. Meanwhile, uncertainty around upcoming Brazilian elections has made investors cautious. We are still looking for opportunities and clarity on Brazil before adding to EM. However, the divergence within EM spreads we are seeing currently is reassuring as it curtails the risk of contagion spreading indiscriminately across EM for now.
César Pérez Ruiz, Head of Investments & CIO