Coffee Break 26.03.2018

We continue to see an underlying favourable fundamental environment with strong global growth in 2018 and 2019, led by the US. Hence, we are looking for an entry point to increase our equity exposure, once current noise appeases. Nevertheless, US financial markets look vulnerable as the technology sector – which led the rebound since the February sell-off – is losing pace.

Moreover, the rising tensions on global trade represent a major uncertainty for markets. After initially targeting steel and aluminium, the memorandum on tariffs also focuses on technology, mainly intended to penalise China for stealing intellectual property, according to the Trump administration.

We note that from now on, the US Trade Representative Robert Lighthizer has 15 days to identify those targets after which a 30 day consultation period with American stakeholders will start. This could exacerbate the global risk-off mode which is supportive for the safe haven JPY. As a result, we have therefore decided to reduce our Japanese equity stance to neutral.

We will continue to closely monitor any new development in the coming days.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

On the short term, we see a less favourable risk-reward momentum. We maintain our neutral stance on equities and we decrease our Japanese equity exposure to neutral.

• Global growth momentum outside the US is likely to have peaked.
• Global monetary tightening is progressive, but the US are tightening first; given the accommodative fiscal policy.
  • The Federal Reserve started its balance sheet reduction in October 2017, hiked in December 2017 and in March 2018.
  • The ECB has recalibrated its programme, buying less bonds as of January. A rate hike should not occur before 2019.
• The escalation of tensions on global trade represent a new development and a major uncertainty.

REGIONAL EQUITY STRATEGY

• We maintain our neutral stance on Eurozone equities. Recent data show the first signals of a lower cyclical growth. The economic expansion in the region remains solid, but markets’ expectations have increased, and this is more likely to lead to disappointments.
• We are underweight on Europe ex-EMU equities. There is less than one year to set up new trade relations during the “Brexit” negotiations and little progress has been made since the start of the year. A hawkish BoE monetary policy stance has put a barrier to GBP depreciation, challenging overseas profit growth.
• We remain neutral on US equities. The US policy mix is evolving as fiscal policy becomes more accommodative and monetary policy more restrictive. We note that economic activity has further accelerated at the turn of the year implying that the growth/inflation mix is not deteriorating yet.
• We have trimmed our Japanese exposure towards neutral. The global risk-off mode is a support for the safe haven JPY. The Bank of Japan confirmed its dovish stance and should not join other central banks in tightening its monetary policy anytime soon but this has yet failed to weaken the currency.
• We keep our overweight exposure to emerging market equities as they benefit from improving fundamentals, favourable sector composition and stronger growth. But, they remain vulnerable to an escalating trade conflict.

BOND STRATEGY

• We are underweight on bonds and keep a short duration
• With a tightening Fed and expected upcoming inflation pressures, we expect rates and bond yields to show an uptrend towards 3% on the 10Y US government debt. In addition to rising producer prices, rising wages, fiscal stimulus and tariffs on trade could push inflation higher. The Fed will continue its hiking cycle beyond March.
• The overall improvement in the European economy could also lead EMU yields higher over the medium term (towards 0.9% on the Bund). The ECB remains dovish in its Quantitative Easing plans and is opposed to a strong euro.
• We have a neutral view on credit as spreads have already tightened significantly and a potential increase in bond yields could hurt performance.
• The on-going monetary easing represents an important support for emerging market debt.

• In the US, durable goods orders rebounded by 3.1% in February, after two monthly declines.
• US initial jobless claims increased by 3,000 to a seasonally adjusted 229,000 as the labour market is considered to be near full employment.
• The jobless rate is at a 17-year low of 4.1%, not too far from the Federal Reserve's forecast of 3.8% by the end of the year.
• In the euro zone, the Markit Composite flash PMI fell to 55.3 in March, below consensus estimate but remains significantly above the 50 level mark.
• The ZEW Indicator of Economic Sentiment for Germany decreased by 12.7 points to 5.1 in March, missing market expectations of 13.1. It was the lowest reading since September 2016.

EUROPE

Negative week for European markets.

• European equities slumped over the week as US-China trade tension materialised.
• Defensives significantly outperformed Cyclicals in a risk-off environment with Real Estate, Consumer Staples and Utilities among the best performers.
• Technology stocks also dropped following Facebook data concerns.
• Country wise, the FTSE MIB outperformed and stayed the best performer YTD helped by Moncler’s performance. The DAX and the Eurostoxx 50 on the other hand were dragged down by their cyclical nature.

US

US stocks suffered steep losses on the back of a turbulent geopolitical environment.

• The large-cap S&P 500 index recorded its worst weekly loss since the start of 2016.
• The technology-heavy Nasdaq Composite performed even worse, weighed down in part by a steep drop in Facebook following revelations about undisclosed use of customer data.
• Financials and Health Care stocks also performed poorly.
• On the contrary, Energy stocks managed to escape the week’s downfall thanks to rising oil prices.
• Most of the main indexes are back into negative territory for the year to date.

EMERGING MARKETS

Emerging market equities plummeted last week as fears of a global trade war hammered markets.

• Investors ran for safety after US President Donald Trump signed a memorandum that could impose tariffs on up to USD60 billion of imports from China.
• These tariffs largely focus on technology sector goods and were intended to penalise China for stealing intellectual property, according to the Trump administration.
• In retaliation, China unveiled plans to impose tariffs on up to USD3 billion of US imports, raising fears of a tit-for-tat escalation that could jeopardise global trade and growth.
• Hefty losses followed on markets across Asia and Emerging Europe.
• China lost around 3% but the currency remained quiet.

RATES

As anticipated the Fed raised its interest rates last week.

• Last week’s FOMC was less hawkish and as anticipated, the Fed raised its key rate by 25bps.
• The 2018 “dots plots” remain static, with two more hikes signalled this year, while a clear upward bias could however be seen in the mean through 2020.
• The FOMC also improved its forecast regarding the economic outlook and Jerome Powell stressed that the impact from the tax reform would be “very uncertain”.
• In the euro zone, with the Bund easing by nearly 5bps, peripherals outperformed despite a risk off environment, especially for Spanish and Italian rates.
• 10Y US, UK, Japan and German yields stood at respectively 2.84%, 1.47%, 0.024% and 0.54%.

CREDIT

Nervous markets after the past weeks sell-off.

• Markets remain on the edge for two main reasons: fears over US tariffs which could lead to a trade war and some hawkish statements by some ECB members after the March rally.
• Derivatives widened significantly with the Itraxx Main going up to 60 bps (+ 10 bps) and the Itraxx Xover reaching 289 bps (+38 bps).
• Cash bonds suffered less with a widening of spreads of 5 bps for Investment Grade and 13 bps for High Yield respectively.

FOREX

Rising EUR vs the USD

• Following the FOMC decision to raise rates, the USD took a leg lower last week.
• The CAD advanced vs. all of its G-10 peers after the February reading on Canada inflation topped estimates.
• The GDP benefited from Central Banker comments on a need for “one or two” interest-rate increases per year suggested by the economic outlook in the U.K.
• The Scandinavian currencies lost ground vs the EUR (from -0.75% to -1%) as the unemployment rate in Norway didn’t match estimates and following the current risk-off environment, which is generally not favourable for the Nordic currencies.

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES