TRADE DEAL: AS EASY AS ONE, TWO, THREE?

Driving equity markets again is the hope that the trade war can soon be resolved, even though no real steps forward have been made in the current round of talks. Meanwhile we think that stocks have become slightly disconnected from economic fundamentals, which are by and large deteriorating. Manufacturing is still taking a hit as doubts about trade prospects weigh on producers of goods and their order books.

Commerce Ministry spokesman Gao Feng last week issued a reminder that the trade tiff began with the imposition of customs duties and needs to end through the cancellation of these duties. The October and December levies must be scrapped as a prerequisite for a deal, he continued. White House economic advisor Larry Kudlow said over the weekend that China and the US are close to reaching an agreement, although it is still not yet ‘in the can’.

In Europe, Germany’s economy narrowly missed entering a technical recession after third-quarter GDP edged up by 0.1% versus an expected contraction of 0.1%. This builds on recent positive surprises on the manufacturing front. The 0.3% increase in latest US retail sales illustrates that the slowdown is gradual, as consumers continue to spend and spend. Despite the progress seen on most economic statistics in September, China now seems to be slowing again. Industrial production rose by 4.7% year on year in October, short of the expected 5.4%, while retail sales grew by 7.2% year on year, the weakest performance in 16 years. Yet while the private sector may be slowing, public spending is rock-solid, showing that Beijing is enacting supportive measures.

Reporting season is practically over in the US. More than 80% of companies have reported forecast-beating earnings and 60% beat top-lines estimates. Granted, broker estimates had been trimmed and intensive buybacks skewed the EPS data, but the resilience shown by US companies is still impressive. In Europe, earnings estimates are being slashed. According to one study, global equities have advanced as if the manufacturing PMI (currently close to 50) were heading past 52, which is optimistic as things stand. With multiples so stretched at the moment, the downside risk is real, which is why we advise cautious positioning.
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