Equity Monthly: Macro and equities divergence increased in October

Equity Monthly: Macro and equities divergence increased in October

Equities 5 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  The disconnect between macro data and equity markets seems to be growing as equities are making new highs despite weaker macro data and earnings growth going negative in emerging markets and close to negative in developed markets. Equity investors are clearly discounting a soft patch in the economy before returning to trend growth. Our view remains that of being defensive.


October was a mercurial month with global equities rising 2.7% in USD terms despite clear evidence that the global economy continues to slow down. In fact, the global leading indicators from OECD have been declining for 20 straight months. The US chemical industry shows weakness to persist into Q2 2020, South Korea export data shows little signs of rebound in Asia and in particularly China, US employment is slowing down, and earnings growth has gone negative in emerging markets and close to negative in developed markets. The disconnect between what we observe in macro data and equity markets has many explanations but one of them is that equity investors are only discounting a soft patch for the economy before returning to trend growth. This is key assumption so any broad-based weakness in the US services sector and employment in general should in theory in set in motion a repricing of global equities.

This year’s 19% rally in global equities has been fueled entirely by expanding valuation multiples which to some degree can be justified as global interest rates have come down reflecting lower inflation and growth expectations. We observe a clear pattern of lower inflation rate translating into higher valuation multiple. This reflects lower hurdle rate for return on capital for companies but also substitution effects from bonds into dividend paying stocks, something we have talked a great deal about during October in our daily equity updates.

In our Q4 2019 Outlook: The Killer Dollar we also showed how the USD is a key driver of equity returns globally. Our findings suggest in the last three major USD cycles that stronger USD coincide with strong US equity returns compared to developed equities ex US and emerging markets. The stronger USD theme is also important to be watching as the USD is a constraint on financial conditions and global growth. For the time being we remain defensive on equities but will switch to overweight as soon as leading indicators are turning higher again and the USD is weakening.

Given the trajectory of macro data, the geopolitical uncertainty on the rise and a bumpy ride on the trade deal we still have the view that volatility could pick up in November and December although this seems like a contrarian view as equities are climbing higher. The VIX is back to levels around July before the August volatility kicked in. In our view equity volatility is fragile to news on the US-China trade deal and US jobs data out today.

Source: Bloomberg

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992