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
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.
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%.
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).
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
Disclaimer The information on the website you are about to enter is intended for “Professional Investors” ONLY. “Professional Investor” is defined under the Securities and Futures Ordinance, Chapter 571 of the laws of Hong Kong as may be amended from time to time.
The information on this website is for information purposes only. It does not constitute advice nor an offer to supply services. All information on this website is not intended to provide professional or investment advice. Therefore, you are advised to seek independent professional advice. Any use of this website and its contents are at your own risk. All materials on this website are protected by copyright. No part of the materials may be modified, reproduced, transmitted and distributed in any format for commercial or public use without our prior written consent. The information contained on this site is subject to modification and update from time to time without notice. Any personal data collected from you on the website will only be used for the specific purposes mentioned at the time of collection or for purposes directly related to those specific purposes. We will retain your personal data only for so long as is necessary for fulfilling the purpose for which they were collected. After that time, your data will be erased. By submitting your personal details, you will be taken to have consented to this limited use of your personal data. If you do not agree, please do not submit your personal details This website contains no offer or solicitation of any security, product or service in any jurisdiction (including without limitation the US and the UK) where their offer or sale is not qualified or exempt from regulation or is prohibited by law. Also, not all products or services provided in this website are available in all countries. Use of this site shall be governed by the laws of Hong Kong Special Administrative Region.