A Healthy Pause on ‘New News’

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So far 2019 has been supportive for risk markets. The Fed appears to have adopted a more passive approach, easing market fears of a potential policy error, and in early January we heard conciliatory rhetoric from the US and China pointing to a workable solution to the trade tariff situation. However, the investor exuberance we saw in January has become noticeably more cautionary this week, as geopolitics have once again heightened uncertainty along with some softer looking economic fundamentals and a rather mixed set of corporate earnings. No surprise, then, that asset prices have undergone a slight correction as we head into the weekend.

President Trump’s announcement that he does not expect to meet the Chinese president, Xi Jinping, ahead of the tariff deadline date of March 1 (after which US-imposed tariffs are threatened to double) did little to cheer markets; particularly when leading White House economist, Larry Kudlow, said there remained “sizeable distance” between the two sides.

In Europe, following on from Donald Tusk’s incendiary “special place in Hell” comment, Theresa May and Jean-Claude Juncker allegedly had “robust but constructive” Brexit talks, though Juncker then re-stated that the withdrawal treaty was not open for renegotiation. In another bizarre breakdown in European harmony, the French recalled their ambassador in Italy, in response to what the Élysée Palace consider to be unacceptable interference in their domestic politics.

The mixed picture from corporate earnings should be expected given the maturity of the current cycle, though of course there have been some headlines that can make investors take a step backwards.  Caterpillar was weak, AMS issued a warning of subdued smartphone demand, Twitter’s Q1 2019 revenue forecast was disappointing, and Tata Motors (owner of Jaguar Land-Rover) reported record losses on lower sales in Europe and China. But there have also been bellwether successes for Philip Morris, Vimeo, T-Mobile, Disney, which all beat estimates.

Central banks on both sides of the Atlantic are clearly adopting a wait-and-see policy based on economic data, and thus we can expect base rates to be somewhat range-bound over the medium term at least, which should underpin markets.

In summary, we think this latest pause in the rebound is healthy and reflective of the rapidly changing news on key events, which will be a common theme as this cycle continues to mature.

Asset selection remains paramount, as indeed does keeping risk ‘close to home’, but buying on dips during periods of volatility, in our opinion, continues to be a sensible and prudent strategy. We don’t think the weakness of the past 36 hours is game changing, but neither do we think it is an opportunity to reach out for high beta assets.