European Long/Short: Macro and market update

18 July 2019

Are yield curves about to invert?
European macro data continues to be soft
Tensions at this month’s G7

Quantitative analysis: Macro Matrix – tactical credit and economic indicators

eurolongshort July 2019

  • Credit markets remain strong, but there has been a marked move in yields at the long end, away from the lows of last month.
  • Strong expectations of both a rate cut in the US and Europe this month. If not, likelihood of 2-10 year spreads inverting. Curve inversion typically augurs a recession. High-yield credit is beginning to show some early signs of weakness after a very strong performance.
  • European macro data continues to be soft, with PMI manufacturing particularly weak. Service data has held up but is showing some signs of strain, notably in Germany. Rising input prices are not yet being passed on, leading to margin fears.

Qualitative analysis: Market Traffic Lights – providing a strategic view

  • Global PMI data and the threat of trade wars continues to be a danger. The G7 meeting at the end of July could highlight these tensions as Europe pushes for a sales-based tax on the US digital giants. We are still waiting for further China stimulus to stabilise its economy, in particular for autos.
  • Growth forecasts are being downgraded for 2019 but the focus will soon shift to 2020, where optimism remains. However, there is a significant risk to 2020 from a weak second half of 2019
  • We are sceptical of the economic impact of a further cut in interest rates. The problem is not the cost or availability of cheap debt but weak demand, weakening orders and thus cuts to investment plans.

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