Coffee Break 26.02.2018

Markets continue to stabilise after the volatility spike earlier this month. Volatility on both equities and bonds has started to decrease. Only the volatility on exchange rates for the USD versus its major peers has not declined to the same tune.

They are some arguments in favour of a depreciation of the USD on a longer time horizon, such as rising deficits. So far, the EUR/USD has not gone higher than 1.25. The Federal Reserve has become more confident in the return of inflation and is seen as more hawkish. Simultaneously, Japan has raised concerns following the recent strengthening of the JPY, a headwind for equities, as exporters get hit.

The next G20 meeting, held in Buenos Aires on 20 March will gather finance ministers and central bankers. Volatility on major exchange rates is likely to last until then.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

While we have reduced our exposure to equities, we remain positive on the euro zone and Japan. We actively manage our options strategies and will remain opportunistic, while looking for an entry point.

• Global economic momentum is accelerating further, however geopolitical risks remain.
  • We concentrate our portfolio’s regional positioning on the euro zone and Japan. Emerging markets are benefitting from supportive fundamentals and a weaker USD.
• Central banks are turning less accommodative:
  • The Federal Reserve started its balance sheet reduction in October, hiked in December and should hike three times in 2018.
  • The ECB has recalibrated its programme, buying less bonds as of January. A rate hike should not occur before 2019.
• Equities have an attractive relative valuation compared to credit. US equities now trade at 17x 2018 earnings, while their forward price-earnings was still above 20x a couple of weeks ago. In addition, strong earnings growth should remain supportive for equity markets’ performance.

REGIONAL EQUITY STRATEGY

• We remain positive on euro zone equities which are supported by a strong economic and earnings momentum and relatively attractive valuations. Some political hurdles are nevertheless present.
• We have kept a neutral –tactical- stance on emerging markets equities.
• We have become less negative on UK equities.
• We remain neutral on US equities but have increased our exposure to the USD by 4%. The Q4 2017 earnings season has been strong with 77% of positive surprises on revenues and 79% on earnings for 425 companies of the S&P500 index. In addition, after the recent market correction, valuations have become less stretched.
• We are positive on Japanese equities as earnings have been progressing so far without a depreciation of the JPY. Being overweighed on Japanese equities has been a winning trade for us so far. Japan benefits from the global expansion and the BoJ will not join other central banks in tightening its monetary policy, leaving credit conditions accommodating.

BOND STRATEGY

• We are negative on bonds and have a low duration now. As the momentum in rising bond yields accelerated, we further reduced our duration in the US and Germany by around 0.25.
• With a tightening Fed and expected upcoming inflation pressures, we expect rates and bond yields to continue their uptrend towards 3% on 10Y US government debt.
• 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 positive stance on emerging market debt, as the on-going monetary easing represents an important support.
  • We are neutral on high yield. 

• In the US, the Markit US composite PMI increased to 55.9 in February, from 53.8 the previous month. This reading shows the steepest rate of growth in the private sector activity in almost 2.5 years. This can be explained by a boost in both manufacturing and services.
• In the euro zone, the core inflation rate YoY for January was published at 1% in line with expectations.
• The ZEW Indicator of economic sentiment for Germany stood at 17.8 points in February (-2.6 points) and remains slightly below the long-term average of 23.7 points. 

EUROPE

Barely positive week for European equities.

• Slowing down European economic data weighed on markets as defensives stocks took advantage of the macroeconomic conditions and significantly outperformed Cyclicals.
• Telecom, Utilities and Real Estate were among the best performers of the week.
• Country wise, Telefonica held back the IBEX while the FTSE 100 lagged peers following HSBC, Reckitt, and BHP’s results
• The CAC40 outperformed, lifted by Total on a bounce in oil prices and strong results from Orange, Saint-Gobain and AXA.

US

Modest gains during a holiday-shortened week.

• The technology-heavy Nasdaq Composite index performed best, helped by strength in semiconductor stocks.
• Utilities and Materials also performed well, while Real Estate lagged.
• Consumer Staples also underperformed, as Wal-Mart sold off early in the week following an earnings miss.
• Markets saw some intraday volatility following the release of the FOMC minutes showing a more hawkish stance from the Fed.

EMERGING MARKETS

Second straight week of gains for Emerging markets equities.

• Stellar gains in large cap stocks in Taiwan and South Korea lifted the markets last week.
• China mainland stocks had a strong start on the week but gave away some gains after the government seized control of acquisitive financial conglomerate Anbang.
• China also suspended the publication of a volatility index in a bid to curb speculative trading.
• India had a difficult week amid growing concerns over an alleged major bank fraud at India’s second-largest state-run lender. 

RATES

US yields rose sharply to 4 year highs last week.

• The FOMC minutes were released last week and indicated that Fed members were comfortable with multiple hikes over 2018.
• In Europe, some weak data from Germany (fall in business confidence) led to a fall in domestic rates over the course of the week.
• Incidentally, this has increased the spread between German and US 10Y bonds to its widest in more than a year. Peripheral yields widened somewhat as Italian elections approach.
• 10Y US, UK, Japan and German yields stood at respectively 2.89%, 1.52%, 0.053% and 0.64%

CREDIT

Cash bond market remained unchanged last week.

• While overall, the cash bond market remained unchanged (at +79bps), the relief witnessed on markets enabled high beta credit to recuperate some of the losses incurred in the previous weeks.
• The synthetic markets saw some widening with the Itrax main reaching 56 bps (+5bps from previous levels) and the Itrax Xover reaching 277 bps (+15bps) as volatility remained somewhat elevated. 

FOREX

Outperforming USD over the EUR last week.

• Some economic data below expectations in Germany sent the EUR down vs the USD last week.
• The JPY was little changed over the course of the week with the currency looking like it was being primarily driven by global equity performance.

WEEKLY MARKET OVERVIEW

 

UPCOMING FACTS AND FIGURES