Monthly Review : February 2019

Monthly Review : February 2019


United States

Much of investors’ attention was centred on trade talks between the US and China. Citing “substantial progress” in negotiations, the US President took the decision to delay a tariff increase on USD 200bln worth of Chinese goods, which was due to take effect on March 1st. The US Commerce Department reported retail sales fell 1.2% in December, the biggest drop in more than nine years, suggesting a strong slowdown at the end of 2018.


Euro area

The European Commission revised its growth forecast lower for the Euro area. The Eurozone is now forecast to grow by 1.3% in 2019 and 1.6% in 2020, compared to previous forecasts of 1.9% for 2019 and 1.7% in 2020. The outlook is particularly bleak for Italy as the commission also slashed the country’s growth forecast to 0.2% from 1.2%, projecting the weakest annual output since 2014.


United Kingdom

Brexit negotiations monopolized much of the debate again this month, as Theresa May spent much of her time negotiating changes to the deal she agreed with the EU last year, hoping to get it approved by the parliament and avoid a disorderly Brexit. Later in the month, the PM offered MPs a vote to push back the March 29 deadline should they reject her deal for a second time. While employment, wages and retail sales data was encouraging, the composite PMI fell close to 50, a barrier under which an economy is considered to be contracting.



In its twice yearly Investment Survey, the KOF found that Swiss firms expect capital expenditure to slow this year. The main motives affecting Swiss companies’ investment decisions up until now were driven by a positive demand trend. This, however, has changed in favor of technological development, which companies assess as more relevant. The Government also announced a budget surplus of CHF 2.9bln, versus a forecast of “just” CHF 300 million. The Federal Council members explained the difference was due to revenue growth and a highly disciplined spending.


Central banks:

Federal Reserve (next meeting: March 20th)

The Federal Reserve released the minutes for its January meeting. The Committee said it “would be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate” and that a pause in its hiking cycle posed “few risks” at this point. The FOMC also said it would be flexible in its approach to normalize its balance sheet. They also attributed the greater volatility at year end to the weaker global outlook, perception of increased policy risks and the partial shutdown of US government.


European Central Bank (next meeting: March 7th)

The minutes of the ECB’s meeting in January revealed concerns about the increasing impact of trade protectionism, and an escalation of trade conflicts, on the global outlook over time. When looking at the Eurozone, members of the Governing Council assessed that the carry over effect from slower growth in the second half of 2018 would entail a lower projection for growth in 2019. It was, however, emphasised that growth would remain positive and that the probability of a recession remained low.


Bank of England (next meeting: March 21st)

As forecast by many analysts, the Bank of England left its rate unchanged at 0.75%. The Bank also downgraded its 2019 growth outlook to1.2% from 1.7%, representing the slowest growth rate since the financial crisis. Mark Carney blamed uncertainty about the Brexit scenario and a global slowdown. In the press conference following the inflation report, the Governor listed the tensions the “Fog of Brexit” is creating for business, households and financial markets.


Swiss National Bank (next meeting: March 21st)

In a letter published to its clients by UBS, the bank sees little probability of the Swiss National Bank raising rates before the European Central banks acts due to the slowing momentum in the Eurozone and to prevent a further appreciation of the franc. UBS anticipates the ECB will hike in the first quarter of 2020 and the SNB will move around the same time.  Its economists do not expect policy rates to return to positive territory before 2021.


Market issues:

  • Alphabet Inc reported fourth-quarter results that beat expectations. Investors were however concerned with the company’s heavy spending to expand its cloud and YouTube businesses that contributed to eroding profit margins.
  • The continuation of economic and trade relations between Switzerland and the United Kingdom after the UK’s withdrawal from the European Union (Brexit) is assured. Federal Councillor Guy Parmelin and the British Secretary of State for International Trade, Liam Fox, signed a bilateral trade agreement in Bern on 11 February.
  • The OECD published a paper on the rising risks of the corporate debt markets. Global outstanding debt in the form of corporate bonds issued by non-financial companies has hit record levels, reaching almost USD 13 trillion at the end of 2018. This is double the amount outstanding in real terms before the 2008 financial crisis corporate debt markets.


Credit Markets:

  • In Turkey, President Recep Tayyip Erdogan seized the country largest lender, Turkiye Is Bankasi, which is partly owned by the main opposition party. Erdogan already increased his footprint in the financial system of the country, as he pledged to take control of monetary policy.
  • Banco Santander opted not to call its EUR 1.5bln AT1 at its first call date, thus becoming the first European bank not to redeem a Contingent Convertible bond. “When making call judgments we have an obligation to assess the economics and balance the interests of all investors. We will continue to monitor the market closely and will seek to exercise call options where we believe it is right to do so,” Santander said in a statement
  • Deutsche Bank issued a weak set of results that fell short of analysts’ expectations. The weak performance was attributed to the performance at its investment bank division. The German bank also cited challenging financial markets as a source of underperformance.
  • China Minsheng Investment Group Corp, a Chinese conglomerate active in the field of renewable energy, aviation, finance and real estate, defaulted on some of its bonds. The Chinese borrower has more than USD 34bln of debt, one of the biggest debt piles amongst China private companies.
  • UBS was ordered to pay more than EUR 4.5bln after a French court ruled against the Swiss bank. The lender was found guilty of illegally laundering funds for French clients, by providing banking services that helped them hide assets from tax authorities. UBS said it would appeal the judgment.
  • Kraft Heinz Co. the owner of brands such as Heinz Ketchup, HP Sauce and Philadelphia, saw its stock price plunge. The packaged food giant wrote down the value of some of its brands by more than USD 15bln to reflect changing consumer tastes and the cost cutting strategy put in place by 3G Capital, a majority shareholder alongside Berkshire Hathaway, did yield the expected results.
  • Vodafone’s senior unsecured ratings were cut to Baa2 from Baa1 by Moody’s and outlook remains negative suggesting another cut could follow. The ratings agency expects leverage will weaken further due to the proposed acquisition of Liberty Global’s assets in Germany and eastern Europe as well as higher spectrum costs and lower earnings forecasts.
  • Coca-Cola took advantage of the buoyant European credit markets and sold EUR 3.5 billion of new bonds to fund its recent acquisition of Costa Coffee from Whitbread. The total order book for four bonds with maturities ranging from 2 to 12 years exceeded EUR 13.5 billion.


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