Coffee Break 12.12.2016

Last week, investors’ attention shifted to the ECB meeting on Thursday. As widely expected, Mario Draghi confirmed an extension of the ECB’s quantitative easing programme beyond March 2017, up until the end of next year, and even longer if necessary. This would add a total of €540 billion euros to the current €1.7 billion stimulus package, making the size of the programme double to what the ECB initially announced in January 2015.

Moreover, the UK parliament overwhelmingly backed (461- 89 in favour) Theresa May’s efforts to start the timetable for triggering Article 50 in March 2017. It nevertheless also backed a Labour motion stating that the government must publish its Brexit plan before execution.

This week, we will closely monitor the meetings of the FOMC on Wednesday and of the Bank of England on Thursday, as well as President-elect Donald Trump’s first press conference since his election on Friday.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

We are slightly overweight in equities versus bonds:

• US elections have shifted flows out of bonds into equities.
• The macro news flow is still well-oriented. We especially expect a stronger US growth and believe in a potential US reflation through fiscal stimulus, tax cuts and regulatory easing in a robust labour market context.
• Central banks are decoupling but they mostly keep a dovish stance:
  • The ECB will keep a steady hand given political uncertainties as it will extend its quantitative easing at least until December 2017. Asset purchases will be however reduced from €80 billion to €60 billion starting from April. Finally, Mario Draghi insisted that there was no tapering on sight.
  • The Fed tightening cycle is at odds with accommodative policies in Japan, the euro zone and the UK. Markets are pricing one Fed hike by the end of this year, two in 2017 and another two in 2018.
• Oil markets continue their rebalancing after the OPEC agreement of a first production cut in 8 years. However, some analysts argue that the promised reduction in production may be insufficient to reduce global oversupply and rebalance markets. Furthermore, US oil production is likely to rise if the Trump administration acts in favour of drilling, as could be expected.
• The medium to long-term economic risks have increased due to the various political events. “Brexit” negotiations, elections in major EU countries and US election results imply high dispersion of possible outcomes.

REGIONAL EQUITY STRATEGY

• We have maintained our slight overweight on euro zone equities as we expect a gradual improvement from the high discount due to political uncertainties.
  • We still have a relative value strategy in favour of the DAX against the FTSE 250.
• We have maintained our underweight in UK equities. A deterioration in domestic UK macro indicators should hit the FTSE250 with significant domestic exposure. We avoid domestically-oriented small and mid-caps and still have a relative value strategy long FTSE 100 against a short FTSE 250.
• We are slightly overweight on US equities. We expect a stronger growth and a rise in corporate earnings in the prospect of post-election reflationary policies and consolidating oil prices.
• We are positive on Japan. The country benefits from a realignment of its policy mix and is a beneficiary of the regime change in the US.
• We have maintained a neutral positioning in emerging markets.

BOND STRATEGY

• We now have stronger convictions on a longer-term rise in US bond yields and therefore have a short on US Treasuries.
• We continue to diversify out of low/negative yielding government bonds:
  • We have maintained an overall below-benchmark duration.
  • We currently have a relative value trade: long Italian yields / short Spanish yields.
  • We remain positive on inflation-linked bonds as US headline CPI is expected to come in above 2% in December for the first time since mid-2014 and should peak at levels close to 3% during Q1 2017.
  • Although we have reduced our emerging debt exposure before the US elections, we still hold an overweight, both in local and in hard currencies.
  • We are slightly positive on high yield. The significant spread tightening has reduced the potential, but the carry remains attractive. 

• In the US, initial jobless claims dropped by 10.000 to a seasonally adjusted 258.000 in the week ending 3 December the Labour Department said. It was the 92nd consecutive week below 300.000, signalling a still healthy labour market.
• The euro zone Markit composite PMI increased to 53.90 in November from 53.3 in October, the best reading since December 2015.
• Investor sentiment in the euro zone deteriorated in December due to political uncertainties and the Sentix index fell to 10 points after reaching a year high of 13.1 points in November.
• German manufacturing orders jumped in October by 4.9% MoM against the prior month's -0.3% and consensus forecasts of 0.6%. 

EUROPE

Positive performance for European equities with the Stoxx 600 closing at 355, up by 4.7% for the week.

• Banking stocks rallied last week on news that the Italian government would take steps to rescue its troubled banking sector.
• Banks extended the rally later in the week after the ECB said it would continue its bond buying measures.
• Health care stocks were also strong performers for the week, and most sectors ended with gains.

US

Positive week for US equities with the S&P 500 closing at 2260 last Friday, up by 3.1%.

• Optimism about the incoming Trump administration's plans for fiscal stimulus through lower taxes and increased infrastructure spending, along with deregulation, seemed to continue to drive investors' sentiment.
• Small-caps beat large-caps last week and value stocks fared better than growth ones.
• This pattern was reflected in the strong gains of the small-cap Russell 2000 Index, which ended the week as the best-performing US index YTD.

EMERGING MARKETS

Positive performance for Emerging markets equities with the index closing the week at 386, up by 2.9%.

• A recovery in risk-appetite combined with higher commodity prices and better manufacturing and trade date lifted emerging market assets last week.
• Russian shares rose to record highs since last September as higher oil prices, hopes that economic sanctions would be lifted, and the sale of a stake in Rosneft to Glencore and the Qatar investment Authority have all helped the local market.
• Korean stocks showed the best performance among Asian peers as parliament voted to impeach President Park, removing political uncertainties and tension.
• In Mexico, the local market, after suffered its worst November in over five years following the US elections, came back as traders jumped on relatively cheap assets.
• The news that UniCredit would sell a 33% stake in Poland's second biggest bank Pekao to two Polish state entities woke up the Polish stock market, which had been isolated from the global stock market rally recently. 

RATES

The Italian referendum result and the ECB meeting on Thursday brought some volatility on global rates last week.

• The result of the Italian referendum made core and non-core debts struggle in the euro zone with the Italian debt lagging versus its Spanish counterpart.
• The main driver of the market last week was the ECB meeting.
• Several announcements were made:
  • The reduction of net asset purchases from ?80bn to ?60bn on a monthly basis from April 2017 even if program would be extended until December.
  • The minimum maturity that the ECB could buy under the PSPP has been reduced to 1 year.
  • The ECB can purchase securities with a yield to maturity below the deposit facility rate, i.e -0.40%
• Even if "tapering" was not mentioned in the ECB statement, euro zone curves steepened sharply.
• Over the week, 10Y US, UK, Japan and German yields stood at respectively 2.42%, 1.30%, 0.05% and 0.35%.

CREDIT

No panic reaction on credit markets following the Italian referendum.

• Markets has a positive reaction to the Italian referendum result as cash absorbed the shock while synthetic indexes were tighter due to uncertainties about the Italian financial sector.
• The main driver last week was the ECB meeting and the decision to extend quantitative measures. This benefited Financials which slightly outperformed their corporate peers.
• Synthetic indexes remained quite stable while corporate spreads tightened following Mario Draghi's press conference. IG credit lost 2bp (127 to 125); while Non-financials lost 3bp (117 to 114) and Financials lost 2bp (145 to 143). iTraxx Main dropped 4bp (78 to 74) while X-over lost 22bp (333 to 311) and Sub Fin lost 14bp (239 to 225). 

FOREX

Week of two halves for the USD.

• The USD struggled against the EUR the during first part of the week, while a dovish ECB meeting finally contributed to lift it upward.
• The EUR depreciated massively post ECB meeting, as Mario Draghi unveiled an extension of its Asset Purchase Program until December 2017
• The JPY continued to suffer against the USD, mainly due to anticipations of a Fed Funds rate hike in December.
• In the EM currency space, the BRL, RUB and COP were the worst performer, while Asian (ex-Japan) currencies held up well against the USD. 

COMMODITIES

Over the past week, commodities were slightly positive, as the GSCI Light Energy gained 1.2%. The index remains positive for the year (+5.7%).

• The WTI lost 0.7% last week, while the Brent lost 0.2%, due to concerns over this weekend's meeting between OPEC members.
• Cocoa prices fell by about 6.5% last week, due to favourable weather in Western Africa and tepid demand for chocolate which are leaving expectations of excess supply for this commodity.
• Natural gas rose by over 2% after US data showed a draw from stockpiles that was in-line with expectations. 

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES