Coffee Break 18.09.2017

Over the past week, our conviction on higher bonds yields and a continuation of the equity market rise, has increased. There is a plenty of possible catalysts to end the months-long range bound market evolution. Beyond (geo)political events, this week’s FOMC is likely to shape the balance sheet management for the quarters to come, and provides a case study for Mario Draghi. Also, the recent easing in financial conditions, will certainly relieve the pressure on the Fed’s shoulders to pursue removing monetary accommodation. In addition, House speaker Paul Ryan announced that the tax plan outline backed by tax writing committees will be released on 25 September. Although execution risk remains, tentative movements towards a bipartisan approach in Washington could end-up prolonging the current expansion cycle further.

In this context, we are well positioned to benefit from the bond yield increase and equity market rebound, and we added further to our exposure to euro zone equities as our fundamental assessment and our technical indicators are sending converging signals.

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 this 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 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.

REGIONAL EQUITY STRATEGY

• We continue to favour euro zone equities, and further increase our exposure to the region based on technical indicators and the supportive fundamental backdrop. Q2 GDP data have confirmed the on-going, more robust and geographically broadening economic expansion and the ECB remains accommodative and corporate earnings keep their strong momentum.
• 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 an execution risk in the announced fiscal stimulus and pro-growth 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 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 overall 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).

BOND STRATEGY

• We are negative on bonds and have a low duration. We expect rates and bond yields to resume their uptrend from this month’s low, driven by a tightening Fed, and potential upcoming inflation pressures. The improvement in the European economy could also lead EMU yields higher.
• 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. 

• In the US, industrial output fell last month (-0.9%) for the first time since January, as hurricanes in the region battered oil, gas and chemical plants.
• Also in the US, consumer confidence slightly declined with the Michigan preliminary consumer sentiment index falling to 95.3 in September, from 96.8 in the month before.
• In the euro zone, industrial production rebounded in July, after a steep fall in June. Overall output rose by 0.1%, according to Eurostat, mostly driven by corporate investments and durable consumer goods. 

EUROPE

Positive week for European equities.

• European equities strengthened last week, with euro zone banks and Industrials outperforming alongside a strong rally in the reflation theme after US, Chinese and UK inflation data all surprised on the upside.
• Basic resources underperformed after the weaker than expected August China activity
• UK exporters were one of the worst segment following the BoE’s announcements and the rise of the GBP.

US

Relief rally last Monday for US equities.

• A particularly strong performance last Monday led to a positive week for US stocks as most of the major indexes reached record highs.
• The rebound came as initial reports of damage from Hurricane Irma were not as severe as previously estimated.
• Apple latest’s press event had little impact on the broader technology sector and the company’s share initially declined before recovering to finish the week little changed.

EMERGING MARKETS

Positive week for Emerging equities.

• Asian markets saw limited reaction to the latest North Korean missile launch over Japan. Both South Korean’s Kospi index and Hong Kong’s Hang Seng index finished the week on a upward note.
• China’s latest batch of monthly indicators showed that the country's economy unexpectedly slowed in August. But on a positive note, retail sales were up by 10.1% last month just below consensus (10.5%).
• In Brazil, President Michel Temer was again indicted on corruption-related charges but this was not expected to result in a trial because of his strong support in Congress.
• Russian stocks slipped last week as oil prices dipped back towards $55 a barrel. 

RATES

The Bank of England left its rate on hold last week.

• Even if the members of the Bank of England kept the bank rate on hold at 0.25%, the statement was more hawkish than expected.
• In the US, consumer prices rose a little faster than expected in August, mainly due to Energy prices.
• 10Y US, UK, Japan and German yields stood at respectively 2.18%, 1.27%, 0.016% and 0.42%. 

CREDIT

Mixed week for credit markets.

• Cash spreads remained unchanged on the week while High Yield spreads tightened by 11bp.
• Synthetic indices performed ahead of next week’s roll with iTraxx Main and Crossover tightening by 2bp and 7 bp respectively.
• Intense activity on the primary market with over EUR 15bn of non-financials and 6bn of financials issues with notable multi-tranche deals from Asahi, Unilever and Softbank. 

FOREX

Positive week for the British pound.

• The GBP experienced the sharpest weekly appreciation amongst other major currencies, as comments from the Bank of England turned unexpectedly hawkish, suggesting rates may rise sooner than expected.
• On the other hand, the JPY had the worst performance last week, as tensions grew in South Asia after North Korea threatened to strike again the Japanese peninsula.
• The EUR also weakened alongside EM currencies as the USD and GBP strengthened. 

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES