There will be a rally in the financial markets in 2019 - Natixis

Analysts at Natixis, point out that the deterioration seen in financial markets in the US and the Eurozone is compatible with a recession scenario and not with a cyclical slowdown scenario. They believe that the right scenario for 2019 is one of a cyclical slowdown and they consider that once investors turn to the mentioned scenario, risk premia in all financial markets will fall sharply and the markets will rally.

Key Quotes: 

“We look at financial markets in the United States and the euro zone. Their very depressed level currently is compatible with the assumption of a recession in 2019. However, we believe there will be a cyclical slowdown and not a recession.”

“This is first due to the fact that financial markets are overestimating the risks (Brexit, trade war, Italy, declining liquidity, leverage), and also the fact that financial markets believe that some countries (Italy) may pull out of the euro, which is impossible.”

“Is also due to the fact that financial markets fail to take into account a number of factors supporting activity (low interest rates, expansionary fiscal policies, lack of inflation, rising corporate profitability, solidity of companies' financial situation).”

“Once investors switch from a crisis scenario to a cyclical slowdown scenario, there will be rally in financial markets with a major decline in all risk premia.”

“The deterioration in the euro-zone markets is due to the return of expectations of a break-up of the euro; we have to keep in mind that the huge size of the euro-zone countries’ gross external debt, mainly in euros, makes an exit from the euro impossible.

“The trade war between the United States and China will perhaps not take place, and if it takes place, it will have a very limited impact on the economies.”

“Yet we believe there will be a cyclical slowdown, a soft landing, and not a recession in the United States and the euro zone.”