Coffee Break 10/10/2016

The OPEC's agreement two weeks ago to slightly cut oil production might resorb the global market imbalanced before mid-2017. The oil price has recently jumped and selling pressure should continue to decrease. This has an important market impact:

• US headline CPI should come in above 2% in December for the first time since mid-2014;
• Base effects of higher oil prices this year should also push the euro zone's headline CPI towards 2% early next year.

The OPEC's agreement two weeks ago to slightly cut oil production might resorb the global market imbalanced before mid-2017. The oil price has recently jumped and selling pressure should continue to decrease. This has an important market impact:

• US headline CPI should come in above 2% in December for the first time since mid-2014;
• Base effects of higher oil prices this year should also push the euro zone's headline CPI towards 2% early next year.

We are well positioned to benefit from these developments through:

• Our exposure to inflation-linked bonds;
• Our exposure to the Norwegian Krona;
• and our positions in emerging markets, US high yield and equities.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : new change

EQUITIES VERSUS BONDS

We currently have a neutral stance in equities vs. bonds:

• The macro news flow is in line with low but positive growth.
  • In the US, we expect accommodative monetary policy to prevail while Chinese authorities will continue to offer a supportive policy mix.
  • 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:
  • For the time being, global growth indicators are little affected by the "Brexit".
  • The UK appears to be quite resilient in the immediate aftermath.
  • Political risks are looming by the end of the year: US presidential elections, Italian constitutional referendum, probable new general elections in Spain and, of course, "Brexit" negotiations.
• Central banks keep a dovish stance, providing ample liquidity to the markets.
  • In the US, solid PMI's and labour market data for the month of September strengthen the case of a Fed rate hike by the end of the year.
  • The Bank of Japan innovates with a yield curve targeting, while the ECB remains accommodative and keeps its policy rates anchored in negative territory and pursuing QE.
• Oil market continue their rebalancing, and recent agreement expectations have led the way to higher prices. This is supportive for risky assets, particularly emerging debt, high yield and inflation-linked bonds. We expect a gradual increase in inflationary pressures and are confident in our inflation-linked exposure.
• Emerging markets face fewer headwinds, thanks to a stabilisation of commodity prices, a working Chinese stimulus and a cautious Fed.

REGIONAL EQUITY STRATEGY

• We have re-evaluated our positioning in euro zone equities and decided to maintain our neutral stance (since mid-August).
  • We see the European political uncertainty as the main reason of relative underperformance of euro zone equities against US ones. Euro zone equities have underperformed by 15% since the beginning of the year, which is, according to our models, in line with the rising political risks.
  • The current risk premium of euro zone equities is attractive, but can be largely explained by the level of political risk.
  • This underpins our relative caution on European assets while we could still tactically benefit from shorter periods of re-rating (implementation of options strategies).
  • We currently have a relative value strategy in favour of the DAX against the FTSE 250, while staying neutral. We anticipate a struggling domestic UK economy following "Brexit".
• We have maintained our underweight in UK equities. The government's perceived hard "Brexit" stance weighs on UK assets, pushing the GBP to new lows, bond yields significantly higher and leading to a substantial equity markets underperformance in common currency terms.
• We have a neutral stance on US equities, as sound consumer expenditures, stable oil prices and a weaker USD should lead to an improving US economy in the second semester.
• We have a neutral stance on Japan.
• Emerging markets remain our main conviction. Fundamentals are improving and valuation is attractive, while a positive turn in flows and an attractive technical set-up shows a re-rating potential.
• Within emerging markets, we favour India. Economic fundamentals are improving, both structurally and cyclically and the resilience of the Indian economy is supported by a domestic reform agenda, which makes the country less vulnerable to external influences

BOND STRATEGY

• Following the OPEC deal, that set the production ceiling between 32.5 and 33 mb/day, and a bullish technical signal on the NOK/CHF, we have decided to implement long position on the NOK against the CHF:
  • The NOK partially benefits from the oil price rebound, while the central bank's interest rates should remain unchanged.
  • The CHF is overvalued.
• We continue to diversify out of low/negative yielding government bonds:
  • We remain overall slightly short duration and have increased this underweight recently.
  • We remain positive on US corporate bonds and emerging debt, both in local and hard currency. Emerging bonds are benefiting from inflows, as they provide an attractive yield compared to developed markets.
  • We are positive on high yield, but have started to take some profit. The significant spread tightening this summer has reduced the potential. Only the carry is still attractive.
  • We are positive on inflation-linked bonds. We view the subdued inflation expectations as a temporary phenomenon and expect wages and consumer price inflation data to rise gradually. This implies a further re-rating of inflation-protected bonds over the course of the coming quarters.
• Regarding currencies, our main strategies are:
  • Emerging market currencies, based on our conviction that the USD peak and low commodity prices are behind us.
  • Commodity currencies, via the NOK against the CHF, to benefit from rising oil prices and an overvalued CHF that upsets the Swiss National Bank.

• In the United States, the nonfarm payrolls report came in at 156.000, below the expectations of 176.000. However, August job creations were revised upwardly to 167.000 from 151.000.
• Another report showed that manufacturing activity in the US is accelerating as the latest ISM manufacturing came in at 51.5, bouncing back into expansive territory after August's 49.4. The new orders index registered 55.1.
• In the euro zone, economic activity expanded at its lowest pace in 21 months as the final PMI composite fell to 52.6 in September. It remains nevertheless above 50, the level that divides growth from contraction, since 2013.
• In Germany, industrial output rose more than expected in September (+2.5%), the highest monthly increase since January. The figure was ahead of the 0.8% level mentioned in a Reuters poll. 

EUROPE

Slightly negative performance for European equities with the Stoxx 600 closing at 339 down by 0.96% for the week.

• UK equities outperformed Continental European ones last week following the weakness of the GBP.
• The main theme of the week was the continuing rotation out of bond proxies into cyclicals and value stocks as yields continued to rise and economic data were on the whole better than expected.
• In the UK, the FTSE100 reached a new all-time high driven by UK listed multinationals exposed to the USD.
• At a sector level, Oil & Gas, Banks and Insurance outperformed the benchmark (2.62%, 2.38% and 1.17% respectively) while Travel & Leisure (-4.61%), Utilities (-5.88%) and Real Estate (-7.05%) underperformed.

US

Negative week for US equities with the S&P 500 closing at 2153 last Friday.

• US stocks fell last week as investors awaited the start of the Q3 earnings season.
• Small-caps, which are typically more volatile, declined the most.
• Sectors that pay high dividends, such as Utilities and Telecommunication services, fared the worst.
• This was probably due to some profit taking following strong performances YTD.
• At a sector level, Financials, Energy and IT outperformed the S&P 500 (1.52%, -0.01% and -0.11% respectively) while Utilities (-3.81%), Telecoms (-3.84%) and Real Estate (-5.26%) underperformed.

EMERGING MARKETS

Positive week for Emerging markets stocks, especially the Energy related ones.

• The Energy sector was boosted by the recent OPEC deal and rising crude prices
• Improving growth prospects in emerging markets also pushed shares higher.
• However, towards the end of the week, hawkish central European bank statements weighted on markets somehow.
• On a stock level, Samsung fared well as the announcement of the group restructuring overshadowed the note7 explosion incidents.
• Finally, fears over heating Chinese property sector set investors on the side-line.
• At a sector level, Energy, Financials and Industrials outperformed the benchmark (4.37%, 1.81% and 1.63% respectively) while Consumer Staples (0.03%), Materials (-0.26%) and Real Estate (-1.53%) underperformed. 

RATES

Global rates markets sold-off last week, on the back of rumours concerning an upcoming ECB QE tapering.

• Huge bond supply and talks over the UK moving from monetary to fiscal stimulus further supported bear-steepening moves across interest rates curves.
• UK nominal and break-even rates increased markedly, as PM Theresa May criticized the "bad effects" of QE and pointed towards more fiscal measures.
• European rates followed the bear-steepening trend of the UK curve, with the 10Y German yield flirting back towards the zero mark.
• US rates also moved higher, as economic releases continued to point towards a resilient economy. 

CREDIT

Euro credit spread remained unchanged last week but behind this, Deutsche Bank, Brexit and ECB tapering dominated headlines.

• Deutsche Bank is working on capital raising measures which could be announced together with the US DoJ settlement. An IPO of its asset management remains also on the cards.
• The announcement that Article 50 could be triggered by the UK towards March 2017 and some advocating of a possible "hard brexit ", pushed risk premium higher last week.
• Worries about a potential tapering by the ECB pushed yields higher but the credit market didn't follow.
• The asset class continue to drive inflows with a EUR supply around 7.35bn over the week, well subscribed. 

FOREX

The OPEC's decision to freeze oil production continued to impact FX markets last week.

• The MXN & BRL were the week's top performers against the EUR.
• The USD appreciated marginally, supported by positive economic releases.
• The GBP slumped, as investors were worried of further fiscal slippage, should the UK adopt fiscal support policies. 

COMMODITIES

Over the past week, commodities rebounded slightly, as the GSCI Light Energy rose by 0.4% and posted a positive return for the year (+2.7%).

• Crude oil (+4.2%) held near $50/barrel after Russia casted doubt over a deal in the immediate future with OPEC, following the cartel's pledge to reduce production.
• Precious metals pursued their downward trend last week as the strength of the USD had a negative impact on prices. Gold sank by 4.6% to $1,255.18/ounce on course for the biggest loss since November. Silver was hit harder, plunging by 9.5% to $17.35 for the steepest slump since 2013. 

WEEKLY MARKET OVERVIEW



UPCOMING FACTS AND FIGURES