5 charts (week 47)

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Singapore electronics exports improve significantly

Electronics export growth in Singapore, a bellwether for global earnings per share, improved significantly in October. While year-on-year electronics exports still recorded a double-digit decline of 16.4%, the drop was far less severe than in previous months. This was contrary to expectations. The latest exports data suggest global earnings have seen most of their decline, although they are likely to go down again in this quarter and next. After that, things look set to improve, helping equities remain close to all-time highs.

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Negative surprises The Citi US Economic Surprise Index has dropped below zero, meaning negative surprises outweigh positive macro-economic surprises. Several nowcast surveys are now predicting very little US GDP growth for this quarter. For example, the Atlanta Fed GDP now forecast has declined to just 0.3%. Hence it is not unthinkable that the US economy is stalling in the final quarter of this year, making investors look to the Federal Reserve for more easing. At this point, however, the odds of that easing happening seem low. And while the pace of GDP growth is expected to pick up next year, there is a real risk that this will take just a bit longer than equity investors in particular can handle.

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It’s oh so quiet! Equity market volatility has dropped significantly in recent weeks. The VIX index is close to its lowest level since July and daily moves in stock prices are muted. In fact, the percentage of days over a one-month period in which stocks move 1% in either direction has dropped to zero. And this has been the case for the last six (at the time of writing, 8 now) trading days. This, however, does not mean you should immediately turn more cautious. First, because there have been much longer periods of such extreme tranquility in markets. For example, between 26 June and 9 October 2018, a period of 76 trading days, there were zero 1% price moves over a one-month period. Second, while this metric is a strong contrarian indicator when volatility is high, hence the number of 1% moves during a one-month period is high, research shows that it’s forecasting power for both equities and investment grade credits is less accurate when things are quiet.

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Hong Kong bill complicates trade deal, reduce risk US congress unanimously passed the Hong Kong Democracy Bill on Tuesday, supporting Hong Kong protestors. President Trump is expected to sign off on it, risking ‘immediate’ retaliation by China. The Chinese yuan, a risk-on risk-off indicator, weakened in recent days. A statement issued by Hong Kong’s foreign ministry said, “Don’t say I didn’t warn you”, using a Chinese phrase that, prior to this year, has only used been in rare cases, like before China invaded India in 1962. This implies that the US and China will struggle to reach a phase-one trade deal, if they reach a deal at all. Given recent market developments, which reflect a trade deal will be reached and lifted some uncertainty for export and manufacturing companies, we have reduced our weight in equities and remain cautious on high yield bonds. While a base case scenario of a marginal improvement in global growth and a return of positive earnings growth still applies, recent developments mean it could take longer for this scenario to materialize.

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