Barclays Markets Weekly 9th August

Week ahead

Markets are keeping their hopes up for positive macro readings next week, after sentiment soured following the recent worsening in trade relations.

In the US, July’s consumer price index (CPI) will be a key metric to watch. Subdued inflation could increase the prospect of further US rate cuts this year. Investors will also find out whether July’s retail sales and industrial production benefited from the temporary trade truce reached at the G20 meeting of world leaders. The August Philadelphia Fed manufacturing index and the preliminary University of Michigan consumer sentiment index will provide a further indication of the health of the economy following the latest escalation in trade tensions.

In China, M2 money growth should remain steady as the country maintains its stimulus measures to support economic growth. Markets will assess whether industrial production and retail sales continued their upward trend in July after recovering in June as they shrugged off geopolitical tensions.

Economic reporting in the eurozone will be quiet next week. The second Q2 gross domestic product estimate is expected to be in line with preliminary readings of just 1.1% growth, reflecting ongoing economic weakness in the region. June’s industrial production data should soften after rebounding in May, in line with weak manufacturing activity.

In the UK, July’s CPI inflation rate is likely to remain around target level as declining energy prices offset a weaker pound. Despite signs of a slowing economy and heightened fears of a no-deal Brexit, June’s International Labour Organization unemployment rate will likely stay at multi-decade lows while July’s retail sales should continue to benefit from upbeat consumer confidence.

Chart of the week

Equities down but not out

Over the past few weeks, the macro landscape has not been what equity markets were looking for. While the US Federal Reserve delivered on a rate cut, the hawkish tilt in its communication was unwelcome.

This was compounded by escalating protectionism fears worldwide. President Trump threatened tariffs on $300bn of Chinese goods and Japan and South Korea revived their trade disputes. To complete the gloomy picture, the increasing probability of a no-deal Brexit and global tensions such as India’s decision to revoke Kashmir’s autonomy sent markets on aggregate into “risk-off” mode.

The worsening sentiment had sent the MSCI World index 5.71% off its 24 July peak by the 5thof August before a slight recovery over the subsequent three days.

The sell-off has investors questioning whether there is worse to come. However, it is worth putting the drawdown into perspective.

Taking into consideration the worst annual drawdown every year since 1988 (excluding years when there were recessions or bear markets), the average drawdown (the fall from the peak to the trough) in the MSCI World index has been 10.8%, and the median was 10.2%. Furthermore, 13 of the last 26 years had an average drawdown greater than 10%.

Should the current drawdown end up being less than 5.95%, it would be the third smallest in 26 years of a bull market. For the moment, while caution is advised, it is too early to start ringing recession alarm bells.

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20/09/2019