Coffee Break 11.09.2017

During last week ECB meeting, members recognised the potential threat of the euro appreciation, leading them to slightly revise down their inflation forecasts for 2017 from 1.6% to 1.5% and for 2018, from 1.3% to 1.2%. Nevertheless, the central bank expects the domestic economy to grow by 2.2% this year, its fastest rate since 2007 and so decided to left its monetary policy unchanged. However, the ECB president Mario Draghi stated that key decisions on the future of the quantitative easing might be taken in October. As an immediate reaction, the euro rallied above $1.20.

(Geo)political uncertainties and central banks will be at the forefront in the coming weeks with various degrees of risks for investors. This implies that there are plenty of possible catalysts to end the months-long range bound market evolution. Our fundamental assessment and our technical indicators are sending converging signals that equity markets are close to important support levels in a longer-term bull market context. In addition, financial conditions remain easy (although the EUR appreciation has a tightening impact on the euro zone), opening margin of manoeuvre for central banks to remove their easing policies gradually. Therefore, we expect bond yields and equity values to rise by the end of the year from current levels.

This week, we will closely follow the Fed and the Bank of Japan meetings, as well as geopolitical developments from both sides of the Atlantic.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

We are positive on equities and remain negative on bonds, maintaining a short duration:

• The robustness of the global economic news flow is supportive. The outlook for the world economy appears solidly anchored above 3% for both this year and the next, while inflationary pressures remain subdued.
  • The euro zone and Japan are expanding above potential.
  • Emerging markets benefit from the bottoming-out of commodities, the USD weakness and the decline in inflationary pressures.
  • In this context, we concentrate our portfolio’s regional positioning on the euro zone, Japan and the Emerging markets.
• Central bank are expected to adapt their monetary policies in the coming months:
  • The Fed is poised to announce a balance sheet reduction next week.
  • The ECB will likely announce its tapering in October.
  • Overall, central banks are confident on the synchronised global growth context and are prudently adopting a tightening bias.
• Equities have an attractive relative valuation compared to credit.
• The main risks for equity markets remain political and mainly concern the US, where the risk of legislative delay in pro-growth policies has further increased. Although the temporary agreement to lift the debt ceiling was a relief, expectations for more clarity on both domestic and international issues in the foreseeable future have fallen significantly.

REGIONAL EQUITY STRATEGY

• We continue to favour euro zone equities. The EU structural and cyclical data are supportive and still surprise on the upside. An accommodative central bank and a strong corporate earnings momentum underpin the attractiveness of the region’s risky assets. The EUR appreciation could impact corporate profits, but improving domestic demand should compensate this negative impact.
• We remain negative on Europe ex-EMU, especially the UK. The deterioration in the “Brexit” negotiations, the difficulties to setup new trade relations (e.g. with Japan) and their impact on the economy pushes us to avoid the region. Relative valuation is rather expensive as earnings have dropped and a political risk premium should be priced.
• We keep our neutral stance on US equities. There is a considerable execution risk in the announced fiscal stimulus and pro-growth policies.
• We are positive on Japanese equities. A strengthening global growth and a supportive domestic policy mix are among the main performance drivers and we have gained more conviction that the BoJ will not join other central banks in tightening its monetary policy anytime soon, which should ultimately lead to a weaker JPY.
• Emerging market equities remain one of our main regional convictions. They benefit from attractive valuations in a robust global growth context. China should not trigger a systemic risk this year and recent data are rather supportive, leading the IMF to revise upward its medium term growth expectations (on average from 6 to 6.4% for the years 2017 to 2021). Furthermore, its relative economic and political stability, added to its long-term systematic approach, partly justify our overweight stance on emerging markets.

BOND STRATEGY

• We maintain our underweight on bonds and a short duration. We expect rates and bond yields to resume their uptrend from June’s low, driven by a tightening Fed, and potential upcoming inflation pressures. We expect rising wages and potential stimulus to push inflation higher, although it takes longer than expected to materialise. Potential US protectionist measures are a wild card (NAFTA renegotiation, China).
• 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.
  • On the currency side, we maintain a lower USD overweight exposure, as the EUR/USD exchange rate broke key resistance levels, and remain short GBP vs. EUR. 

• In the US, durable goods orders declined by 6.8%, but however, without taking into account transportation, they increased slightly.
• Initial jobless claims jumped last week to 298,000, the highest level since April 2015. The surge in claims reported by the Labor Department offered an early glimpse of the hurricanes' impact on the economy.
• In the euro zone, economic activity remained solid and steady in August with the Markit Composite PMI standing at 55.7, following Eurostat’s final Q2 GDP growth estimation of 2.2%, annualised.
• Investor morale, measured by the Sentix Economic Index, improved in September to 28.2 from 27.7 the previous month, as concerns about the potential impact of a widening car emissions scandal in Germany and the development of the US economy faded. 

EUROPE

Flattish week for European equities.

• The DAX and the Eurostoxx50 outperformed last week due to gains made by the automobiles and chemicals sectors.
• The IBEX 35 underperformed, dragged down by the banking sector.
• Banks and insurers were the worst performers last week as yields continued to decline and both sectors reacted to US hurricane news.

US

Slightly below par performance for US equities.

• Hurricane Irma and North Korea dominated investors minds and sent markets down at the start of the week.
• Stocks regained some of their losses midweek following the deal between President Trump and Democrats to delay budget fights until December.
• Advancing oil prices benefitted energy stocks.
• Health care, utilities, and real estate stocks ended the week in an upward mode while consumer discretionary, financials and technology shares lagged.

EMERGING MARKETS

Another flattish week for emerging equities.

• Asian markets were generally higher last week and over the weekend with no new North Korean treat, and positive CPI data from China.
• Latin and Central American markets were hit by the consequences of the hurricanes in the Caribbean.
• In Brazil, the supreme court ordered the arrest of Joesley Batista, a billionaire businessman, at the centre of a huge political corruption scandal. 

RATES

No policy changes from the ECB.

• As expected the ECB left its monetary policy unchanged last week and Mario Draghi will probably announce the calibration of the tapering at the next ECB meeting in October.
• The ECB is concerned about the EUR strength and Mario Draghi also reiterated that an adjustment on rates would only be considered at the end of the QE programme.
• In the US, the Trump administration and the Democrats finally agreed to extend to December the debt ceiling resolution.
• The Bank of Canada somewhat surprised the market with a rate hike of 25 bps.
• 10Y US, UK, Japan and German yields stood at respectively 2.07%, 1.00%, -0.01% and 0.31%. 

CREDIT

Insurance and reinsurance sectors were under the spotlight last week due to the hurricanes in the Caribbean.

• The BofA Merrill Lynch Euro Subordinated Insurance Index widened by 7bps last week.
• Cash indexes (corporates and banks) didn’t move significantly while synthetic indexes (mainly x-over and subfin) kept tightening.
• Dynamic week in terms of new issues with the launch of the first non-senior preferred debt by Belfius. 

FOREX

Momentum intact for the EUR.

• As the ECB kept its dovish stance and postponed any QE tapering discussion to the October meeting, the trade weighted EUR index reached highs not seen since the end of 2014.
• Following the Bank of Canada surprise rate hike, the CAD outperformed all major currencies last week. 

WEEKLY MARKET OVERVIEW





UPCOMING FACTS AND FIGURES