New Year same bear

Summary

Stock markets start the year jumpy, if not panicked, though don’t expect risk appetite to make a big come back just yet.

Manufacturing hangover

How the global economy fares in 2019 will not, of course, be set in stone on the basis of a raft of sentiment snapshots. Still, as investors trickle back to global stock markets, the prevalence of downbeat data prints is troubling. Most importantly, whilst the gravity of Caixin’s China PMI slipping half a point in December is questionable, its first move to a contractionary reading in 19 months is difficult to shrug off. It was not, however, particularly surprising. Cooling economic activity at the end of 2018 across much of the G10 echoed softening in emerging economies even earlier in 2018. Hence the reaction says more about the market’s psychological state than the data. We can label that state ‘jumpy’. With index futures having drifted higher during low holiday liquidity after December’s hyper-volatility, markets seem keen to return to a more cautious footing as volumes normalise.

Winning reaction to Carige fail

The panic that markets flirted with in closing weeks of 2018 appears to be absent, for now, even if there’s no mistaking the ‘risk-off’ mood. Although ECB administers took control of Italy’s €84m Banca Carige, none of the customary signals of contagion fear were triggered. Benchmark BTP yields continue to ebb, as they did in the last several weeks of 2018, after a more conciliatory solution emerged on the budgetary front. Indeed, Europe’s banking sector fell less than the trade-sensitive basic resources index on Wednesday.

Defensive mood set to linger

That said, a quick glance at industrial sector performances on both sides of the Atlantic in 2018 was sobering. The most defensive sectors were either among the few segments to post gains (e.g., S&P 500 Healthcare) or were relatively buffered (see STOXX 600 Utilities). Mean reversion strategies will almost inevitably come back into vogue this year as investors scope out stocks unjustifiably savaged by blanket selling. Investors look likely to run the rule over the energy industry (chiefly oil) and automobile names. Typically, such differentiation takes a while to appear. And with quarterly earnings just around the corner, the market may have another pretext to hold off for several more weeks. With huge uncertainties remaining on global growth, trade, Brexit, U.S. monetary policy/dollar strength, we don’t expect the main day to day pattern seen at the end of 2018 to change any time soon. Hence stock market rallies continue to have a higher probability of being sold fairly fast than of gaining traction.

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