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SystematicEdge: Monthly Market Overview December 2019

06 January 2020

MARKET CONTEXT: In 2020, execution of trade deals that were announced in 2019 (US-China, US-Canada-Mexico, UK-EU), will be governing factors for the performance of financial assets

  1. Global Macro: 2020 revised OECD GDP growth forecast: World 2.8%, USA 1.9%, China 5.8%, Europe 1.2%. Economic growth is still slowing, yet it remains positive in most economic zones. Inflation remains subdued in developed markets (US 2%, EU 1%, Japan 0.50%, Australia 1.7%). All central banks committed to remain accommodative with low interest rates for 2020. The increase of US dual deficit on trades and budget favour a weaker USD. This global macro-economic backdrop underpins risky assets including global equity & EM.
  2. Financial Markets:  Equity: The Hang Seng jumped 7%, S&P500 +2.2%, Eurostoxx +1%. Fixed Income: 10 year US yield gained 0.14% to 1.91% (US treasury sell off) while Emerging market bonds rallied (EM government credit spreads tightened -0.30% on average). Corporate bonds rallied as well with High Yield spreads tightening further: US & Europe -0.30%. Currencies: USD weakened against most currencies: EUR +2%, JPY +0.8%, CHF +3%, AUD +3.65%, CNY +0.8%, RUB +3.4%. Commodities: Rallied across the board on the back of the US-China trade agreement and USD weakening: Oil +5.4%, Gold +4.4%.
  3. Risks:  Extreme risks have been reduced following the first phase of the US-China trade deal and the validation of the Brexit date on January 31st. However, these risks remain present and the potential for disappointment regarding the execution of these deals is high. Other geo-political risks are rising: US-Iran conflict escalation, restarting of North-Korean missile testing, volatile US political environment (impeachment process & presidential election).  Risk Management: The financial market is still dislocated as the long term correlation between assets is broken across asset classes. This is due in part because of the liquidity support from central banks and also the political pressure on the financial system by the US presidency. This outcome is an unstable equilibrium with an unpredictable outcome. Consequently, the portfolio has reduced exposure to the downside and increased positive optional exposure in both Equities and Safe Havens (US Treasuries & Gold).
  4. Opportunities for 2020: Equity: the global macro backdrop, positive price action momentum and positive investor flows is supporting the current equity rally. The US equity valuation is rich with prices at the all-time high while China and many sectors in Europe are 10 to 20% below their 2018 highs, offering much higher upside potential. Fixed income: High Yield European corporate bonds have an attractive carry / credit risk ratio as the ECB is purchasing euro corporate bonds within a zero financing rate environment. Commodities: the low interest rates, weaker dollar and geopolitical risks for the year to come underpin a Gold price rally. 

See below for the updated scenario analysis for 2020