Coffee Break 03.04.2018

During the presidential election campaign in the US, the now President Donald Trump promised his voters to “Make America Great Again” and put America first. At the time, he promised a 45% increase in tariffs on all imports from China, feeling like the US were getting a bad deal from its biggest lender. In the latest White House announcements, the administration planned a 25% levy on $50 billion in Chinese goods. What could be the potential impact of a trade war on the world economy? Current estimations say that China’s GDP could handle it. The question is if the US Treasuries bond market can handle having China as a dissatisfied client as the country is the biggest US creditor of the US. Germany and the Emerging markets could be more at risk. Germany because a trade war would negatively impact the DAX. And the emerging markets because of China’s exports to the US as 40% comes from other countries in the form of intermediate inputs.
Donald Trump, who boasts about his negotiating skills and his “art of the deal”, always uses the same operating memorandum: He starts aggressively, like in his campaign, and negotiate afterwards. If it is again the case, current measures’ impact should remain low.

Meanwhile, another deal has to be made: Facebook’s latest data scandal not only hit the company’s share price but also the remaining GAFA stocks, i.e. the likes of Amazon, Netflix and Google. Mark Zuckerberg will have to testify before Congress – although no date has been set - over the data scandal and find a good compromise on Facebook’s accountability to its users. Besides the specific current issue with data, headwinds against the IT sector include potential broader regulation on privacy measures, new tax policies that could eat some profit growth and ultimately, Trump’s tax reform, which could be more beneficial to other sectors. Let’s see what the future brings as it includes cash repatriation, possible buybacks and a new earnings season.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

On the short term, we see a less favourable risk-reward momentum. We maintain our neutral stance on equities and we decrease our Japanese equity exposure to neutral.

• Global growth momentum outside the US is likely to have peaked.
• Global monetary tightening is progressive, but the US are tightening first; given the accommodative fiscal policy.
  • The Federal Reserve started its balance sheet reduction in October 2017, hiked in December 2017 and in March 2018.
  • The ECB has recalibrated its programme, buying less bonds as of January. A rate hike should not occur before 2019.
• The escalation of tensions on global trade represent a new development and a major uncertainty.

REGIONAL EQUITY STRATEGY

• We maintain our neutral stance on Eurozone equities. Recent data show the first signals of a lower cyclical growth. The economic expansion in the region remains solid, but markets’ expectations have increased, and this is more likely to lead to disappointments.
• We are underweight on Europe ex-EMU equities. There is less than one year to set up new trade relations during the “Brexit” negotiations and little progress has been made since the start of the year. A hawkish BoE monetary policy stance has put a barrier to GBP depreciation, challenging overseas profit growth.
• We took a partial profit on our US equities exposure. The US policy mix is evolving as fiscal policy becomes more accommodative and monetary policy more restrictive. We note that economic activity has further accelerated at the turn of the year implying that the growth/inflation mix is not deteriorating yet.
• We have trimmed our Japanese exposure towards neutral. The global risk-off mode is a support for the safe haven JPY. The Bank of Japan confirmed its dovish stance and should not join other central banks in tightening its monetary policy anytime soon but this has yet failed to weaken the currency.
• We keep our overweight exposure to emerging market equities as they benefit from improving fundamentals, favourable sector composition and stronger growth. But, they remain vulnerable to an escalating trade conflict. We keep our eyes on the budding trade war.

BOND STRATEGY

• We are underweight on bonds and keep a short duration
• With a tightening Fed and expected upcoming inflation pressures, we expect rates and bond yields to show an uptrend towards 3% on the 10Y US government debt. In addition to rising producer prices, rising wages, fiscal stimulus and tariffs on trade could push inflation higher. The Fed will continue its hiking cycle beyond March.
• The overall improvement in the European economy could also lead EMU yields higher over the medium term (towards 0.9% on the Bund). The ECB remains dovish in its Quantitative Easing plans and is opposed to a strong euro.
• We have a neutral view on credit as spreads have already tightened significantly and a potential increase in bond yields could hurt performance.
• The on-going monetary easing represents an important support for emerging market debt.

• The US economy expanded at an annualized 2.9% QoQ, beating market expectations of 2.7%. Personal consumption expenditures and private inventory investment were revised up.
• The US unemployment rate stood at 4.1% in February 2018, unchanged from the previous month's 17-year low and slightly above market expectations of 4%.
• In march 2018, the consumer confidence indicator remained unchanged at 0.1 point in the euro zone compared to February.
• The unemployment rate in the euro zone stood at to 8.6% in January 2018, unchanged from the previous month's nine-month low.

EUROPE

Small gains for European Equities.

• The UK blue chip FTSE 100 index led the way last week with gains over 2% heading into the four-day Easter weekend (European markets are closed on Good Friday and Easter Monday).
• Markets were boosted by merger rumours with shares of pharmaceutical companies GlaxoSmithKline and Novartis up on news that GSK would buy out Novartis’ stake in their consumer health care joint venture.
• Also, Renault rallied on reports that it was in merger talks with Nissan.

US

US equities recovered from the previous weeks’ losses.

• The Nasdaq Composite lagged other benchmarks due to steep losses from major players in the Technology segment. Nvidia and Tesla sank due the recent incident involving a self-driving car.
• Facebook was also back in the red due to the investigation by the FTC over the use of customer data
• A steep drop in Amazon caused the Consumer discretionary sector to join technology and energy stocks among the week’s laggards.
• Consumer staples stocks performed well, on the other hand, as did Real Estate and Utilities shares, whose heavy dividends became more attractive as long-term bond yields decreased.

EMERGING MARKETS

Fears of a trade war weighted on Emerging stocks

• The selling pressure on technology shares weighed on China, Taiwan and Korean markets.
• Investors took note of developments ahead of potential talks between the US and North Korea after China confirmed that North Korean leader Kim Jong Un met with Chinese President Xi Jinping for talks.
• Turkey had a difficult week as investors assumed that it would be vulnerable to higher borrowing costs due to heavy reliance on external financing to plug its current account gap.
• South Africa fell sharply, putting the country on track for its worst quarterly decline in eight years led by media and internet group Naspers.

RATES

US treasuries moved lower on the back of the current risk-off environment.

• The combination of Trump rhetoric and equity sell-offs took their toll as investors flocked towards safe havens,
• In the euro zone, it was not just the Bund that saw lower yields but peripherals also with Spanish, Italian and Portuguese rates moving lower.
• 10Y US, UK, Japan and German yields now stood at respectively 2.75%, 1.34%, 0.040% and 0.49%.

CREDIT

Volatile week for credit markets.

• The week started with concerns over the “Trump tariffs” and was followed by sell-offs in the technology sector on the back of data privacy and automated driving tech issues.
• Furthermore, theses turbulences combined with unusual supply as 2018 issuances are lagging the previous year over the same period.
• The cash bond markets saw some spread widening, particularly on the EUR High Yield market which ended at +305 bps, while the EUR Investment Grade cash bond market was relatively stable at +96 bps).
• The derivatives markets were volatile with ITRAXX over, reaching 283 bps and the ITRAXX main moving lower by 2 bps to 59 bps.

FOREX

Slightly lower EUR vs the USD

• Profits taking made the JPY weaker last week, even in an risk-off mode as trade wars fears rose.
• The Scandinavian currencies lost ground versus the EUR in this environment.
• The NZD and the AUD were both basically unchanged against the USD.

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES