Coffee Break 10/9/2017

Global growth has firmed and last week’s data (i.e. global PMI, Japanese industrial production, US and German factory orders) confirmed that the expansion is both geographically broadening and gaining momentum.

As a result, the IMF is expected to upgrade its global growth forecast for this year and the next. This forecast will be presented during the World Economic Outlook, this Tuesday in Washington DC. The event brings together central bankers, ministers of finance, members of parliaments, private sector executives and academics.

In Europe, and more specifically in Spain, tensions between the central government and the Catalonian region have mounted following last weekend’s referendum. But we have not seen any contagion from the Spanish political situation for the time being, albeit it puts some downward pressure on the EUR. The local political situation is deteriorating more than expected, but the direct economic effects of this uncertainty are likely to be rather limited, if access to finance remains unimpaired. As Spain guarantees Catalan government debt, these State guarantees and ECB liquidity provisions contain macro risks and are key to preventing any contagion via public debt markets and banks. 

In addition to the developments in Catalonia, we will monitor the coming general election in Japan, the 19th National Congress of the Communist Party in China and the start of coalition talks in Germany in order to extract new market catalysts.

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. However, while we remain overweight on euro zone equities, we have tactically reduced our exposure as we decided to take our profit on our already increased exposure in September.

• 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. 
  • We concentrate our portfolio’s regional positioning on the euro zone, Japan and the Emerging markets. While we are still positive on Japan, we suspect that Emerging Markets could face some headwinds given the strengthening of the USD.
• Central bank are expected to adapt their monetary policies in the coming months:
  • The Fed will start its balance sheet reduction in October.
  • 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. Q2 GDP data have confirmed the on-going, more robust and geographically broadening economic expansion while the ECB remains accommodative and corporate earnings keep their strong momentum. The pause in the recent increase of the EUR acts as a support after a more challenging summer for EMU equities.
• As a result of the strengthening USD and technical indicators, we are reducing our exposure to Emerging markets equities down to “neutral”.
• As we are gearing towards a soft “Brexit”, we are adopting a neutral view on GBP.
• We keep our neutral stance on US equities. There is an execution risk in the announced fiscal stimulus and pro-growth policies. Nevertheless, we note that there are timid movements towards a bi-partisan approach in Washington.
• 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. Despite the coming elections, political risk should be limited.

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.

• In the US, non-farm payrolls decreased by 33.000 in September, impacted by the hurricanes in the region. This represents the 1^st drop in payrolls figures since September 2010. Employment rose in health care, warehousing and transportation but declined mostly in food services & drinking places as well as in other industries. Importantly, household employment surged by 906.000 leading to a fall in the unemployment rate to 4.2%.
• The ISM manufacturing PMI rose to 60.8 in September from 58.8 in August whereas expectations were at 58. A rise in new orders, production and employment triggered this highest reading since May 2004.
• In the euro zone, the Markit Composite PMI increased to 56.7 from 55.7 in August, well above the 50 point mark. The variables that the index tracks are on a steady improving path.

EUROPE

European equities ended the week slightly higher

• The FTSE 100 outperformed significantly led by exporting companies while, due to the events in Catalonia, the IBEX was the worst performer of the week
• The DAX was helped by the USD’s strength, which benefited the Automobiles sector.
• Sector wise, Basic resources outperformed significantly, led by mining companies following the rally of copper prices and the low GBP. 
• Telecom, Real estate and Utilities underperformed on higher bond yields and steepening curves.

US

New round of records of major US indexes last week.

• The S&P 500 Index notched its eighth consecutive daily gain before falling back a bit last Friday. It was the longest winning streak since 2013.
• As has often been the case in recent months, this rally coincided with exceptionally low volatility with the VIX index closing at its lowest level on record since its inception in 1993.
• Supportive economic data seemed to be behind much of the positive sentiment with the ISM at its highest level in September since 2004. 

EMERGING MARKETS

Stellar gains in Asia and Latin America last week. 

• Last week’s gains reflected the upbeat mood currently seen on world stock markets.
• Brazilian shares briefly broke above their historical high level, boosted by the outlook of an accelerating economic recovery and lower interest rates. 
• Peru’s stock index rose to its highest level in nearly five years, boosted by a jump in shares of miner Volcan after Glencore said it was ramping up its stake in the firm.
• Markets in Hong Kong extended their gains to a near 10-year high on upbeat sentiment over plans by China’s central bank to bolster lending to small companies while mainland China and Korea markets had been closed for the weeklong national holidays.

RATES

The publication of US payrolls figures impacted US and European bond markets.

• US payrolls were weaker than expected (-33k vs. +80k) last month while the unemployment dropped to 4.2% and wages soared on a yearly basis (+2.9% vs. 2.5% expected).
• This triggered a selloff in US treasuries and European bond markets. 
• The Catalan independence referendum fuelled selling pressure on Spanish bonds with spreads against Germany widening by 8bp. 
• The ECB minutes revealed that the committee discussed APP tapering options and that most members were concerned about the appreciation of the EUR. 
• 10Y US, UK, Japan and German yields stood at respectively 2.40%, 1.40%, 0.045% and 0.50%.

CREDIT

The political turmoil in Spain lead to some widening in credit markets. 

• Further volatility is expected in the coming weeks on Spanish debt markets, as the Catalan situation unfolds.
• European cash spreads narrowed very slightly, with the Investment Grade index continuing its flattish trend (standing at 97 bps).
• The synthetic market on the other hand was more volatile and widened over the course of the week with the Itraxx Main up by 1.5 bps at 56 bps and the Itraxx Xover initially narrowing by 4 bps, before widening again to 246 bps.

FOREX

The USD kept its positive momentum last week and outperformed many peers. 

• The USD performance resulted of speculation on hawkish candidates in the race for the next Fed Chairman and following the release of the latest US employment data.
• In the UK, Theresa May’s leadership is weakening as more party members are calling for her resignation. This political uncertainty pushed down the GBP and the currency ended the week as the worst performing one.

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES