This week we cover the discussions to form a coalition government in Italy, three key pieces of news out of the UK, EU and US. We also provide an update on changes to our equity holdings.
As the Italian elections took place on 4 March, it was deemed likely that the new government would be a centre-right coalition led by Silvio Berlusconi, whose Forza Italia would join with the Northern League and the Brothers of Italy to form a slender working majority. And while the votes made the 5Star Movement the largest party in the lower house, few believed that they could form a coalition and take power. However, weeks on and with discussions becoming protracted, some now believe that the 5Star Movement and the League could decide to work together –the least desirable result from the viewpoint of other Eurozone governments and financial markets.
The IHS Markit purchasing managers’ index of manufacturing activity edged higher to 55.1 in March, up from 55 in February. However, the services and construction surveys showed activity weakened, reflecting the impact of the extended spell of cold weather. The service sector purchasing managers’ index dropped to 51.7 in March from 54.5 in February, and the lowest reading since immediately after the EU Referendum. Meanwhile, the construction purchasing managers’ index dropped from 51.4 in February to 47.0 in March, which is below the 50 level that denotes expansion.
The composite purchasing managers’ index for the region slid to 55.2 in March, slightly below the estimate of 55.3 that had been previously issued. In particular, it was growth in Germany’s services sector that faltered, with business activity rising at the slowest rate for seven months, while new orders and employment levels also struggled. New factory orders in Germany, meanwhile, rose by a weaker-than-expected 0.3% in February, while German industrial production fell back by 1.6% in February, the sharpest monthly fall since August 2015. These are the latest signs that growth in the Eurozone’s biggest economy may have slowed in the first quarter of this year.
The US economy added a lower-than-forecast 103,000 jobs in March. However, the data for February was revised higher to 326,000, taking the average monthly job gains over Q1 2018 to 202,000. Meanwhile, the unemployment rate held steady at 4.1%, while average hourly earnings increased to 2.7% on a year-on-year basis, up from 2.6% in February. In his first speech as Fed chair, Jay Powell, however, sought to subdue wage growth by suggesting the US labour market was not "excessively tight" and endorsing a "patient" approach to raising rates.
While volatility has made a come back, we still believe that the underlying fundamentals that should drive stockmarkets are solid, with company earnings’ forecasts improving and most major economies still set to deliver good growth levels. With this in mind, we have made some changes to our equity holdings to benefit from this backdrop. As a result, we have cut our European allocation by 1% of portfolios. We used these profits and some of our cash position to increase our US equity holdings to be in line with our strategic asset allocation position of 10%, add to our Japanese equity holdings by 1% to reach 7% -which is an overweight position for 7IM –and raise our level of Emerging Market equity investments by 1% to reach 6.0% of our overall portfolios. While we have trimmed our European overweight, we are still overweight and positive on the region.
THREE ANNOUNCEMENTS DUE THIS WEEK
11 Apr –UK Balance of Trade (Feb) // 11 Apr –US Inflation Rate (Mar) // 12 Apr –Eurozone Industrial Production (Feb)
SOURCES: BLOOMBERG, MARKIT, REUTERS, 7IM
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