The CIO office’s view of the week ahead.The week gone by saw some good news in Europe in the form of a debt relief agreement for Greece that ends eight years of bailouts and gives that country some measure of spending flexibility. The agreement sparked an encouraging rally in Greek equities and bonds. The latest flash purchasing managers’ index (PMI) figures also suggested that business sentiment is steadying in the euro area, whose economy looks to have performed decently in Q2 2018. But the devil is in the detail – PMI indicators for manufacturing have cooled – and the same applies to last week’s high-level commitments from the French and Germans to further economic integration and euro area reform. This week’s EU summit has a packed agenda: not only do leaders have to put some meat on
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The CIO office’s view of the week ahead.
The week gone by saw some good news in Europe in the form of a debt relief agreement for Greece that ends eight years of bailouts and gives that country some measure of spending flexibility. The agreement sparked an encouraging rally in Greek equities and bonds. The latest flash purchasing managers’ index (PMI) figures also suggested that business sentiment is steadying in the euro area, whose economy looks to have performed decently in Q2 2018. But the devil is in the detail – PMI indicators for manufacturing have cooled – and the same applies to last week’s high-level commitments from the French and Germans to further economic integration and euro area reform. This week’s EU summit has a packed agenda: not only do leaders have to put some meat on the bones of reform plans, they also have to deal with even more pressing problems such as curbing mass immigration while preserving the free movement of people within Europe and dealing with the Trump administration. Trade tensions are adding a further layer of political uncertainty on top of that coming from Italy, and even Germany. While we wait for the new Italian government to present its first budget in September, there is fear it will exceed the fiscal targets fixed by Brussels, setting the stage for confrontation. We note that Italian spreads over the Bund rose again last week, up to 234 bps for 10-year paper. The Italians may well be forced to rein in their fiscal ambitions, but Italy continues to represent a predicament for now, with Italian bonds and spreads likely to remain highly volatile.
Trade issues have caught up with China and triggered large outflows from emerging markets (EM) assets last week. It could be that EM are now close to capitulation, making them a more interesting investment proposition. There are signs of the Argentinian peso stabilising, while the Mexican peso made big gains against the US dollar last week. Are markets becoming more comfortable with the prospect of a win by left-wing populist Andrés Obrador in Sunday’s general election? For our part, we prefer to wait for the smoke to clear on the election front before we give a vote of confidence to Latin America.
Cesar Perez Ruiz, Head of Investments & CIO