NN IP: Post mid-terms, on to the next hurdle

So far, the passing of the US mid-term elections has failed to spark the hoped-for end-of-year rally. This time around, the usual positive market performance once mid-term elections are over and uncertainty has been removed has hardly materialized. The relief lasted exactly one day. By the end of the week, equity markets had fallen back into lethargy. This is not due to a lack of supportive corporate news or a worsening of macro-economic data. In fact, US earnings were strong and the earnings news flow in Europe has improved. Macro data continue to be mixed with some signs of life appearing in German industrial production alongside weakness in the Chinese PMI. The latter, however, has spurred Chinese authorities to step up their stimulus measures. In addition, sentiment on these fundamentals has improved recently.

It looks like risk appetite is still weak as a consequence of three risk events: Brexit, the Italian budget and trade protectionism. Of these three, the last has the biggest global impact and the meeting between Trump and Xi end-November will be key. Markets would welcome a constructive outcome, for example a willingness to continue talking and the freezing of further measures. This might eventually kick-start that end-of-year rally. But the opposite is also true. A further escalation would clip the wings of the market. This binary outcome, which to a certain extent is also valid for the other two risk events, is keeping investors on the sidelines. In addition, our short-term technical indicators paint a fairly neutral picture as do several sentiment measures. 

We made no changes to our TAA from last week and maintain a neutral stance on all asset classes. This nevertheless implies a positive overlay relative to what our signals indicate. We think the constructive fundamental macro and corporate outlook, which is not fully captured by the signal set, justifies this for the time being.