Markets will continue to rise even today after a very strong performance in Asia (Nikkei +2.3%, China +1.8%, Australia +1%) and some hopes on Trade-War.
Yesterday the Hong Kong Index had the biggest gain since 2011 (+4.6%), today there has been a positive “contagion” to other Chinese venues and Japan.
In Europe we had a rally in Luxury names as the Chinese have picked the diplomatic way in the HK debate satisfying one of the 5 demand of protesters. The extradition bill, which triggered the protests, has been withdrawn. The remaining 4 demands are: leader Carrie Lam to step down, an inquiry into police brutality, for those who have been arrested to be released, and greater democratic freedoms. Time is all in China’s favour and they would likely grant a few concessions to have one month of quietness.
On Trade war, we reiterate our belief that no agreement should be found soon although Trump would give the market some reassurance to support it. Chinese officials are scheduled to travel to US in October after September talks failed. Lower-level officials are in discussions this month to lay the groundwork for meaningful progress. We actually think that it is an excuse for the market to rise given the low level of positioning.
Yesterday was an important day for Brexit where we had 3 defeats in 2 days for Boris Johnson. The House of Commons backed a bill aimed at blocking a no-deal Brexit on 31 October, which should be completed in the House of Lords by tomorrow evening. Basically, Boris Johnson should find an agreement with EU by 31st of October or asked for an extension of article 50 (not allowed to exit with no deal). In addition, The House of Commons rejected the call for an early general election.
Some want to hold election after the 31st of October to ensure no-deal outcome avoided and to capitalize on Johnson’s failure to fulfil his pledge to leave by then. FT noted Labour leader Corbyn planning no-confidence vote possibly as soon as Monday once bill becomes law.
In Italy, what a couple of months can do. Italy moved all the way from a potentially EU-skeptic Government with concerns on debt levels to potentially be one of the most EU-friendly countries out there and with the novelty of some fiscal headroom. PM Conte to be sworn-in at 10:00, confidence vote on Monday. The new Finance minister is Mr. Roberto Gualteri, a guy very closed to Brussels.
S&P says new Government could pave way for policy change and ease pressure on downgrade threat.
Importantly, you can exclude Italy from the risks into year-end. Noise will be plenty but factually this is the new (short-term) status quo.
It seems that all stars are aligning with a more relaxed situation in Hong Kong, an avoided hard Brexit and a stable (short term?) Italian political situation. If you add that to some hopes on Central Banks easing, very low equity positioning and negative sentiment we shouldn’t be surprised that the “pain trade” is upwards for the moment.
The Trade-War situation is unlikely to change in the short-term but any news giving some hope is just the “icing on the cake”
Macro-wise, let’s briefly analyze the US ISM data released on Monday as it fell below the fateful threshold of 50, indicating contraction: since 1948 there have been 17 surveys under 50, of which 10 anticipated the recession. However, if we only analyze the episodes in which it fell for the first time under 50 after 2 years, it has happened just 9 times and we have seen an average return of 12% for the S&P in 1 year.
If we analyse the global PMI data, the US one is still not in negative territory and global PMI after an “unprecedented” descent has shown the first small uptick (also helped yesterday by Chinese data).
The message we got is therefore that is not all bad and we could soon witness a stabilization of Macro data. This factor is clearly visible on the chart showing the US Macro Surprise (red) vs the S&P Index (blue).