• Equity markets arrested their decline this week, helped by some positive developments on the US – China trade front. However, concerns over the global growth outlook remain acute, with further weakness in the Eurozone PMIs and uninspiring Chinese data. EM equities are continuing to stabilize vs DM.
• Our Global equity strategists do not believe that equity volatility seen in 2H of this year is a sure sign we are entering a contraction phase in 2019 and find clear similarities to the ’15-’16 episode. In the 2H of ’15, the markets were also deteriorating fast, with EM/Eurozone/Cyclicals all down 30% and US HY credit spreads widening by more than 400bp. Most believed then that US was slipping into a downturn, but the US recession didn’t come and the markets strongly bounced over the next two years, in 2016 and 2017. What stopped the rot was the Fed pausing in March’16, USD peaking at the same time, and China stimulus coming through. Fast forward to present, where growth fears are again in full swing, but Fed might be turning more dovish, EM FX is up for tree months in a row and Chinese FAI is bouncing. In a sense, some slowing in US growth at this stage should not be seen as a negative, but should take the edge off the USD, the Fed and the risk of further trade escalation. Equities have derated 15-20% ytd, HF beta is the lowest since 2008 and the Bull-Bear sentiment indicator the most negative since 2016. Our strategists were cautious on EM entering 2018, but now believe EM should outperform in 2019. Within DM, they stay OW US and relatively more cautious on Europe, due to weaker earnings prospects and the continued political uncertainty .

JPMorgan