MarketDesk Research notes that the past two weeks have seen a strong reversal in the global markets. Is the reversal a changing of the guard?
- A noticeable trend emerged last week and this week: what worked early in 2019 suddenly stopped working. Flows changed and investor risk appetite increased as global markets changed course.
- Early 2019: Investors focused on trade and global growth, which lead to defensive positioning. Outperformers: Large-caps, Growth, Low Volatility, Defensives, Fixed Income, Developed Markets, & USD
- Past Two Weeks: Improving investor sentiment. Outperformers: Small-caps, Value, Cyclicals, Equities, Emerging Markets, & foreign currencies
- The rotation from defensive positioning to risk-on is puzzling against the current backdrop of trade wars, Brexit, and weak economic growth. None of those risks have disappeared or materially changed.
- The coming weeks will either confirm or reject the current rotation trend, but this feels more like an unwinding of crowded 2019 trades than a wholesale market change.
Equity Market Performance
- Cyclicals outperformed Defensive for the second week in a row
- South Korea & China continue 1M outperformance in Asia; US-China trade hopes elevated
US -- Cyclical sectors outperformed Defensive sectors for a second week in a row (+1.8% 1W) as investors fled bonds and defensive sectors for riskier assets. On US-China trade, the Trump administration delayed the 10/1/19 tariff increase by two weeks as a goodwill gesture. Last week was primarily a risk on week for investors. Energy (+3.2%), Financials (+3.1%), Materials (+2.7%), and Industrials (+2.5%) outperformed. Tech (+0.2%), Consumer Staples (+0.3%), and Utilities (+0.3%) were the laggards. From a sector perspective, the last two weeks have been a significant reversal from what's worked YTD.
Global -- All global regions showed positive performance this week. Gains were led by the Middle East& Africa (+2.5%), Asia Pacific (+1.9%), and Europe (+1.6%). The majority of Asia-Pacific was up on risingUS-China trade negotiation hopes. In the EU, Germany's Finance Minister hinted the government maybe ready to pump in "many billions, billions of Euros" into the economy, the UK Parliament successfullyfought back against a no-deal Brexit, and the ECB cut interest rates and resumed its bond buyingprogram.
At the country level, South Korea (+3.1% 1W, +10% 1M) and China (+2.0% 1W, +8.7% 1M) bothcontinued their recent strong performance trade on renewed hopes of US-China trade negotiations. InEurope, Germany (+2.1% 1W, +8.6% YTD) was positive this week after the Finance Minister hinted atincreased government spending to counter a slowdown.
