Coffee Break 11/21/2016

Over the past week, investors closely watched any news regarding the composition of the future White House staff and cabinet members after the election of Donald Trump.

Meanwhile, the election of Donald Trump has had a significant impact on interest rates worldwide. We expect yields to continue their uptrend in the coming months at the prospect of an increased fiscal spending, a continuing rise in consumer prices, a sustained rise in US inflation expectations and an interest rate hike by the Fed. Although bond yields may have experienced a short-term overshooting, these are good reasons to maintain our short duration conviction and short position on US bonds.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : new change

EQUITIES VERSUS BONDS

We are now slightly overweight in equities versus bonds:

• The macro news flow is in line with low but positive growth.
  • In the US, we expect a tightening Fed in a "high pressure economy" and a rate hike by the end of the year.
  • Chinese authorities will continue their proactive fiscal policies and prudent monetary measures.
  • Europe is showing resilience following the "Brexit" referendum.
  • The stabilisation in commodity prices mitigates downside risks on a global scale.
• The medium to long-term economic risks have increased due to the various political events:
  • While the possible outcome of the Italian referendum on 4 December is unclear, a resignation of Matteo Renzi and new elections have a low probability. But a recapitalisation of the banking sector should take place before the year-end.
  • Donald Trump's election increased market uncertainties. We will monitor any hints on the composition of the future White House staff and cabinet members.
  • A fiscal deficit widening is likely to be announced during the BOE Autumn statement on 23 November.
  • The two-year "Brexit" negotiations should start by the end of Q1 2017.
• Central banks keep a dovish stance, providing ample liquidity to the markets.
  • The Fed is still on track for a December rate hike. The Fed Fund Futures are now moving towards the September Fed dots. Consensus expectations for a December interest rate hike are now at more than 95%.
  • The Bank of Japan innovated by yield curve targeting, while the ECB is expected to clarify its intentions at the December meeting.
  • Oil markets continue their rebalancing. However risks persist regarding the effective implementation of the OPEC's agreement on an oil production freeze (to be voted on the OPEC's next meeting on 30 November), as some members have increased production in October. Furthermore, US oil production is likely to rise if the Trump administration acts in favour of new drillings, as could be expected.

REGIONAL EQUITY STRATEGY

• We maintain our slight overweight on euro zone equities.
  • We still have a relative value strategy in favour of the DAX against the FTSE 250.
• We maintain our underweight in UK equities.
• We have a slight positive stance on the more defensive side of the US equity market.
• We have a neutral stance on Japan.
• Despite the fact that emerging markets are still attractive, we have progressively reduced our emerging markets exposure before and after the US presidential election to reach a neutral positioning. This way, we want to protect our portfolios against possible protectionist measures.
  • We still prefer India thanks to improving economic fundamentals, both structurally and cyclically and an important domestic reform agenda, which makes the country less vulnerable to external influences.

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 have decided to implement a relative value trade: long Italian yields / short Spanish yields:
    • Italian spreads have widened significantly approaching the constitutional referendum on 4 December. While the possible outcome is unclear, a resignation of Matteo Renzi and new elections have a low probability.
    • Italian yields look attractive, especially compared to Spanish ones, where all the good news has already been priced in and instability could reappear quickly.
• We remain positive on inflation-linked bonds. Consumer prices should continue to rise thanks to base effects related to the oil price rebound, an increasing wage pressure in a US economy that is close to full employment and increasing producer prices in China. As a result, we expect a sustained rise in US inflation expectations that are still too low. The latest (October) Michigan 5-10Y consumer inflation forecast already rose to 2.7%.
• We have maintained a moderately positive stance on emerging debt. The carry trade looks less attractive in the post US election environment.
• We are slightly positive on high yield. The significant spread tightening has reduced the potential, but the carry remains attractive.

• According to the Commerce Department, US retail sales came in above expectations in October (+0.8%), as households bought motor vehicles and a range of goods.
• US consumer prices rose by 0.4% in October, their biggest increase in six months.
• In the euro zone, industrial production fell by less than expected in September (-0.8%), driven down mostly by a 5.6% drop in the output of durable consumer goods.
• In Germany, investor morale brightened more than expected in November with the ZEW index of economic sentiment surging to 13.8 from 6.2 in October, beating a Reuters consensus forecast of 8.1. 

EUROPE

Slightly positive performance for European equities with the Stoxx 600 closing at 339, up by 0.56% for the week.

• European stocks closed the week nearly flat, with Italy and Spain recording steep declines.
• Utilities, Energy and Basic materials were dragged lower, largely impacted by the rising USD
• With the quarterly earnings season coming to a close, nearly 60% of the companies in the Stoxx 600 are beating earnings estimates.
• At a sector level, IT, Travel & Leisure and Retail outperformed the benchmark (3.66%, 3.10% and 2.55% respectively) while Telecoms (-0.42%), Utilities (-1.91%) and Basic Resources (-2.63%) underperformed.

US

Positive week for US equities with the S&P 500 closing at 2182 last Friday.

• Stocks built on their postelection rally, spurring most of the major benchmarks to all-time highs.
• Small caps showed the best performance of the week
• The technology-heavy Nasdaq Composite Index established a new record early Friday but fell back in late trading and ended the week slightly lower.
• Financials stocks continued to outperform at the start of the week, helped by higher bond yields, and mainly due to anticipation of less regulation under a Trump administration. They gave back some of their gains at midweek, as profit taking followed several analysts' downgrades.
• At a sector level, Telecoms, Financials and Energy outperformed the S&P 500 (3.02%, 2.24% and 1.92% respectively) while Utilities (0.22%), Consumer Staples (-0.14%) and Health Care (-1.23%) underperformed.

EMERGING MARKETS

Another negative week for Emerging markets equities.

• Emerging market stocks suffered last week with local currencies weakening against the USD and US bond yields soaring.
• In India, prime minister Narendra Modi's surprise ban on Rs500 and Rs1,000 currency notes is unnerving investors; primarily because most small businesses, which drive 40% of the Indian economy are heavily dependent on cash.
• The CNY hit an eight-year low while at the same time China's foreign reserves are dropping for the fourth month in a row, indicating that the central bank is still actively intervening in the market.
• In Brazil, lenders led the Ibovespa higher amid renewed optimism President Michel Temer will be able to rein in a budget deficit and win back investors' confidence.
• At a sector level, Telecoms, Energy and Consumer Staples outperformed the benchmark (0.11%, -0.01% and -0.27% respectively) while Industrials (-0.89%), Materials (-2.00%) and Health Care (-2.14%) underperformed. 

RATES

The past week has been marked by decent US economic figures and some volatility on peripheral debts in the euro zone.

• 10Y US increased and contributed to a global flattening over the week.
• The Fed has confirmed the high probability of a rate hike in December and multiple ones for 2017.
• In the euro zone, Italian and Spanish spreads widened significantly, while the movement for France was moderated.
• Over the week, 10Y US, UK, Japan and German yields stood at respectively 2.28%, 1.41%, 0.25% and 0.02%.

CREDIT

Credit cash market suffered during the week with the iBoxx EUR Corp widening by 8bp.

• Rising government yields had a negative impact on Credit investors who reduced their exposure, mainly at the long end of the curve; meaning that curves steepened by 5-10bp on average.
• Peripheral names weakened with a 20-50bp widening probably due to the uncertainties around the Italian referendum.
• Market liquidity was very poor, due to the global market environment but also as we are heading into the year-end.
• Credit derivatives remained more resilient (ex. iTraxx Main +4bp).

FOREX

The USD was the main performer last week, helped by the steepening US yield curve, robust macroeconomic publications and higher expectations of a December rate hike.

• The EUR underperformed as focus turned towards political risks in France and Italy.
• The JPY continued to suffer, as yield differential against the US favoured the greenback.
• The CAD and NOK appreciated after an upturn in oil prices, while the AUD corrected due to a fall in iron ore prices.

COMMODITIES

Over the past week, commodities were slightly positive, as the GSCI Light Energy gained 0.9%. The index remains slightly positive for the year (+1.3%).

• The WTI rose by close to 4% last week, while the Brent lost about 3%. Expectations of an OPEC deal to limit production were offset by oversupply concerns, as well as a rallying USD impacting prices.
• Sugar prices dropped by 7% last week, as demand remained strong but production experienced some shortage in Africa and Asia.
• Cotton prices surged last week by close to 4% as the supply continued to decrease, fuelled by China's stocks sell-down.
• Wheat prices went up last week as winter wheat plantings were slashed by nearly 35m acres.

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES