Coffee Break 13.03.2017

Global growth continues to expand in a synchronised way, driven by stronger macroeconomic leading indicators, showing a solid economic momentum. Last week’s strong US job report was no obstacle for a Fed hike this week. Economic surprises remain at a high level, although they start to look toppish in the US and in Europe. This way, markets might be disappointed on US growth ahead of enacting fiscal stimulus measures.
Risk aversion measures have also increased over the last month in the euro zone, as investors remain cautious due to lasting political uncertainties. They nevertheless stand at levels, which, support equity markets’ growth.

In this context, we keep our overweight on equities and still favour the US, the euro zone, Japan and the emerging markets.

This week, we will closely monitor the FOMC meeting and the Dutch general elections this Wednesday.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

We are overweight in equities versus bonds:

• The macro news flow is still well-oriented. Data released in the first months of the year continue to surprise on the upside, confirming our view of a synchronised global expansion. In addition, the potential of US reflation through fiscal stimulus, tax cuts and regulatory easing in a robust labour market context has been confirmed by President Donald Trump during his address to Congress. Slippage in the expected timing of the fiscal stimulus is a risk, but the dose of US reflation is leading investors to postpone end-cycle anxieties.
• Central banks’ actions are decoupling but their tone has turned less dovish:
  • The ECB has confirmed, during its last press conference, that it would extend its stimulus programme until December 2017, standing ready to increase the programme in terms of size and/or duration “if the outlook becomes less favourable or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation”. A media report on a discussion moving the deposit rate up next year while continuing QE at a further reduced pace confirmed that there is less urgency to keep extreme monetary accommodation in the euro zone.
  • The Fed indicated its intention to hike interest rates “sooner rather than later” according to Dallas Fed President Robert Kaplan. Markets are positioned for a hike this Wednesday. The Fed tightening cycle remains at odds with accommodative policies in Japan, the euro zone and, to a lesser extent, the United Kingdom.
• Equities have an attractive relative valuation compared to credit, and their expected return should be boosted by the end of earnings recession in the US and Europe.
• Oil markets continue their rebalancing after the last OPEC agreement. However, OPEC members have only slightly cut production in February, which remains above the agreed 32.5 mbd. Meanwhile, US rigs have been re-opening, implying a greater production which weigh on oil prices.
• Important political risks remain: upcoming elections in Europe (The Netherlands & France this spring and Germany in September) and “Brexit” negotiations. Moreover, the wide range of possible outcomes of Donald Trump’s presidency includes the risk of policy error.

REGIONAL EQUITY STRATEGY

• We have maintained our overweight on euro zone equities, as we expect a gradual improvement from the high discount due to political uncertainties. Moreover, the BofA Merril Lynch Fund Manager survey has confirmed positive investors’ positioning as allocation to euro zone equities surged to an 8-month high.
• Recent news flow indicated that the triggering of Art 50 of the Lisbon Treaty might happen before the end of March. In this context, we keep an underweight position on UK equities. We continue to avoid domestically-oriented small and mid-caps and still have a relative value strategy long FTSE 100 against a short FTSE 250.
• We are overweight on US equities. We expect stronger growth and a rise in corporate earnings, especially under President Trump’s spending policy. The earnings recession is now clearly behind us and profit growth should reach double-digit figures. Valuations are high, so earnings growth is crucial for the US equity markets’ performance.
• We remain overweight on Japanese equities which we expect to benefit from an favourable domestic policy mix, stronger US growth and, ultimately, a weaker currency. Although, the JPY has stopped decreasing against the USD as for now, Donald Trump’s policy and Fed measures should maintain upward pressure on the USD.
• We are slightly overweight on emerging market equities, as they appear less vulnerable than in the immediate aftermath of the US elections. US protectionist measures look less likely as Donald Trump did not announce anything new on trade during his address to Congress. Moreover, they still benefit from attractive relative valuations. Earnings growth has been revised a little upward thanks to increasing commodity prices. However, rising interest rates in the US and a stronger USD could however cause some outflows for this region.

BOND STRATEGY

• We have maintained a duration underweight.
• We continue to diversify out of low/negative yielding government bonds:
  • We remain positive on inflation-linked bonds. We expect the recent rise in inflation expectations to be sustained as wages and consumer price inflation data rise gradually, led by the US. In addition, upcoming fiscal easing looks likely. The expected re-rating of inflation protected bonds is now well underway. US manufacturing prices are likely to peak in the first quarter of this year, while inflation at the Chinese factory gates, feeding US import prices, is pushing inflation higher.
  • We have a relative value strategy: long German Bund / short French OAT due to increasing uncertainties surrounding the French election. We also see the strategy as a hedge against the European political risk.
  • We have a slight overweight in emerging market debt, both in local and in hard currency terms. Carry remains attractive and negative financial implications of the US presidential election, due to a stronger USD, are receding.
  • We are slightly positive on high yield, even as the significant spread tightening has reduced the potential, the carry remains attractive.

• In the US, initial jobless claims rose by 20,000 to a seasonally adjusted 243,000 the labour department said. The labour market continues to tighten amid a sharp drop in job cuts in February.
• Non-farm payrolls increased by 235,000 in February, above the consensus of 200,000 and following an upwardly revised 238,000 in January. This strong figure paves the way for an interest rate hike by the Fed this Wednesday.
• In the euro zone, the Sentix index rose to 20.7, its highest level since August 2007 and above the Reuters consensus reading of 18.5. Investor sentiment improved as concerns that political risks could end the economic recovery, dissipated.
• In Germany, industrial production grew by 2.8% in January, comforting fears that global uncertainties could put the brakes on Europe’s largest economy. 

EUROPE

Slightly negative week for European equities with the Stoxx Europe 600 down by 0.53%.

• Retail stocks were lower early in the week, following lacklustre UK sales figures.
• Lower than expected factory orders in Germany also weighed on sentiment.
• Energy stocks fell midweek but recovered by Friday.
• All in all most markets were flattish by the end of the week.

US

Slightly negative week for US equities with the S&P 500 down by 0.44%.

• US stocks moved modestly lower last week, with the S&P’s 500 recording its first weekly drop since mid-January.
• Small-caps underperformed large-caps for the fourth consecutive week.
• The technology-heavy Nasdaq Composite outperformed and ended within 0.9% of its record high.
• Falling oil prices weighed on energy companies and dragged the overall market lower.

EMERGING MARKETS

Slightly negative week for Emerging equities with the main index down by 0.50%.

• The coming interest rate hike in the United States weighed on Emerging markets stocks last week.
• Commodity exporting countries such as Brazil, Peru and Russia slumped, hurt by a 5% fall in oil prices on Wednesday.
• Meanwhile in South Korea, stocks ended at a more than one-week high and the KRW strengthened against the USD following the impeachment of President Park Geun-Hye over a scandal involving the country’s Chaebol conglomerates, paving the way for an election in 60 days. 

RATES

ECB news and the coming Fed rate hike weighed on markets.

• In Europe, the ECB acknowledged that “balance of risks to growth has improved”, increasing pressure in the long end (bear steepening) of the curve.
• Similarly, US sovereign rates moved higher with market participants pricing a 100% probability of a Fed hike this week and strong NFPs figures.
• 10Y US, UK, Japan and German yields stood at respectively 2.60%, 1.24%, 0.08% and 0.48%. 

CREDIT

Investment Grade credit remained relatively immune to increase in bund yield.

• Investment Grade credit spreads lost 1bp vs govies during the week but High Yield spreads widened by 14bps.
• Increasing M&A activity last week with PSA bidding on OPEL, PPG on Akzo Nobel and Suez Environnement buying GE water in the US.
• European high grade supply has slowed with €8.8bn in the past week.

FOREX

ECB statement positive for the EUR.

• The more than hawkish intervention by Mario Draghi last week boosted the EUR.
• Commodity related currencies dropped last week in conjunction with oil prices.

Negative week for commodities with the GSCI Light Energy down by 3.49%. The index is now negative for the year (-1.56%).

• Global commodities from oil to metals and grains posted their biggest weekly declines in months on Friday.
• Increasing US oil inventories pushed the price of a barrel of domestic crude below $50 for the first time since December.
• Gold, was hit by the coming Fed rate hike and dropped below the critical $1,200 an ounce support.
• Copper traded near a two-month low and declined by 3.5%, its largest drop since last August.
• Last Thursday a report on soybean futures were poised for their biggest weekly loss since December on forecasts of a record Brazilian crop.

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES