Coffee Break 04.12.2017

While European equity indices gave back some performance during the month of November, the S&P 500 registered another positive month. Since Donald Trump’s election one year ago, the index has not registered one downward month.

Last Tuesday, Jerome Powell, nominated by Donald Trump to lead the Fed, had a confirmation hearing before the Senate Banking Committee. Powell currently serves as Federal Reserve Board Governor, the main governing body of the Federal Reserve. He was chosen by Barack Obama in 2012. If confirmed, he is committed to pursuing the Fed’s current approach to monetary policy with gradual interest rate hikes under the condition that economic growth remains healthy. With economic data still surprising on the upside (e.g. personal income and spending, housing data, consumer confidence), the case for an interest rate hike at the next meeting is coming together.

Looking forward, we expect regions outside the US to perform better, such as Japan and the euro zone. Within the latter, we identify small and mid-caps as particularly attractive at the current juncture and we raise our overweight exposure to this segment.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

While we are positive on equities and still positive on both EMU and Japan, we approach the end of the year and want to lock in our gains while using cautiousness.

• Global economic momentum is accelerating further however, geopolitical risks remain an obstacle with increasingly tense relations between North Korea and the US as well as in the Middle East, between Saudi Arabia and Iran.
  • We concentrate our portfolio’s regional positioning on the euro zone and Japan. Emerging markets could face some headwinds if the USD strengthens.
• Central bank divergence becomes more obvious:
  • The Fed has started its balance sheet reduction and another rate hike in December looks likely.
  • The ECB has announced that it will pursue its quantitative easing but will cut the amount to EUR 30bn starting next January. Asset purchases will continue for at least 9 months in 2018 and interest rate increases should not happen before 2019.
• Equities have an attractive relative valuation compared to credit.

REGIONAL EQUITY STRATEGY

• We remain positive on euro zone equities which are supported by a strong economic and earnings momentum and relatively attractive valuations. We have increased our exposure to European small caps on the basis of good visibility on the domestic European profit cycle.
• We have kept a neutral tactical stance on emerging markets equities, as a result of the current USD level and technical indicators.
• We remain negative on UK equities. The hawkish BoE monetary policy stance has put a barrier to GBP depreciation, challenging overseas profit growth. Domestic political wobbles add to difficult “Brexit” negotiations and limited results in setting-up new trade relations. The Autumn Budget Statement confirmed the dull outlook.
• We remain neutral on US equities. While we see progress on the upcoming tax bill, the case for interest rate hikes is coming together. At least the transition from Janet Yellen to Jerome Powell should be smooth as he presents himself as “a pragmatic moderate” who would - largely - continue the Fed’s current policies.
• We are positive on Japanese equities. A strengthening growth and a supportive domestic policy mix are among the main performance drivers and we have gained more conviction that the Bank of Japan will not join other central banks in tightening its monetary policy anytime soon, which should ultimately lead to a weaker JPY. Furthermore, Japanese earnings have been progressing so far without depreciation of the JPY.

BOND STRATEGY

• We are negative on bonds and have a low duration. The improvement in the European economy could also lead EMU yields higher as political risks recede and the ECB remains overall dovish in its QE recalibration.
• With a tightening Fed and expected upcoming inflation pressures, we expect rates and bond yields to continue their uptrend from September’s low.
• We continue to diversify out of low-yielding government bonds:
  • We have a neutral view on credit, as spreads have already tightened significantly and a potential increase in bond yields could hurt performance.
  • We have a diversification in inflation-linked bonds.
  • We keep our diversification to emerging market debt, as the on-going monetary easing represents an important support.
  • We are more or less neutral on high yield. The correction on US high yield observed recently is not expected to continue. 

• In the euro zone, consumer confidence increased to 0.10 in November from -1.10 in October.
• The YoY euro zone flash Consumer Price Index missed expectations in November and was still below the ECB target of 2%, standing at 1.5% YoY against an expectation of 1.6%.
• Still, the positive economic momentum has pushed unemployment down to its lowest level in nearly 9 years, at 8.8% in October.
• In the US, factory activity fell more than expected in November with the ISM manufacturing index at 58.2, from 58.7 in October. However, the new orders component advanced, pointing to strengthening manufacturing conditions.
• Initial jobless claims were better than anticipated and printed at 238K, better than the consensus expectations of 240K. 

EUROPE

Slightly negative week for European markets.

• Some rotation from large outperforming sectors this year like IT, Chemicals and Basic Resources to more defensive ones like Retail, Utilities and Telecom was observed.
• The deal between Ocado and Casino boosted the retail sector and poor performance from ASML and SAP detracted the performance of the IT segment.
• Country wise, the FTSE 100 underperformed, dragged by a stronger GBP, and the IBEX outperformed, led by IAG.

US

Uneven week for US equities

• US stocks were mostly higher but investors saw some dispersion of returns among the major indexes.
• The Dow Jones Industrial Average notched its best weekly gain for the year, while the technology-heavy Nasdaq Composite Index recorded a loss.
• The financials sector outperformed as an increase in long term yields boosted the outlook for bank lending margins.
• Energy was strong after the rally in oil prices, following an agreement between OPEC and Russia to keep current production limits.

EMERGING MARKETS

Emerging market stocks fell last week due to the poor performance of the IT sector.

• Asian tech bellwethers such as Samsung Electronics and Tencent fell, following the Wall Street sell-off of IT names.
• Brazil also had a difficult week as investors and analysts focused on attempts by President Michel Temer to whip up the votes he needs in Congress to pass the pension bill, seen as vital to bolster the nation’s fiscal health.

RATES

Mixed week for core bond yields.

• Wednesday, the Gilt yield surged after the European Union and the United Kingdom agreed on a preliminary “Brexit” bill.
• On the back of this potential UK deal, and following stronger than expected German CPI print, the core bond yields ended the week mixed.
• In the US, Jerome Powell’s Senate testimony appeared dovish as he suggested the labour market had still room to tighten.
• 10Y US, UK, Japan and German yields stood at respectively 2.39%, 1.29%, 0.025% and 0.34%.

CREDIT

Slightly positive week for credit markets.

• Investment Grade cash spreads tightened by 2bp but High Yield widened by 6bps.
• Regarding derivatives, iTraxx Main tightened by 2bps and iTraxx Xover by 7bps.
• Solid series of Investment Grade issuance with more than EUR 10bn while High Yield deals accounted for more than 2bn.

FOREX

The GBP was the clear winner last week.

• Progress on the “Brexit” negotiations combined with good economic data provided positive support for the GBP.
• Worst performers last week were both SEK and NOK. The SEK is still in negative momentum as the Q3 GDP disappointed and the NOK suffered following weaknesses in October retail sales.
• In emerging currencies, the ZAR gained 3.5% after Moody’s maintained its rating on South Africa. 

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES