Coffee Break 9/26/2016

The Fed has left its rates unchanged and US markets rallied at the news. The Fed's next meeting is right before the US elections and the markets anticipate no change just before such an important event. All eyes are riveted on the 14 December meeting - especially now that the Fed has insisted on the fact that the conditions were met for a hike this year.

The Bank of Japan has decided to introduce a target for 10-year interest rates in its most recent attempt to revive economic growth and increase price inflation. Markets reacted slightly positively at the news.

Emerging markets remain our main convictions and especially India is standing out as fundamentals, including GDP growth expected at 7.5%, are pointing in the right direction.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : new change

EQUITIES VERSUS BONDS

We have slightly decreased our exposure to bonds:

• We protected our portfolios against an extension of rates' increase via the use of options.
• The focus is now on government actions and fiscal easing to support growth, which could put more pressure on bonds.
• Inflation should progressively pick up. Economic agents and market expectations are very weak and close to record lows while wage pressure have started and deflation exported by China is reducing and going to disappear in the near term.
• The macroeconomic news flow is in line with a sluggish, but positive growth.
• Central banks keep a dovish stance.
  • Led by the Bank of England, they provide ample liquidity and remain highly accommodative.
  • The Fed left its rate unchanged at its last FOMC meeting. Three voting members dissented in favour of an immediate rate hike, while at the same time the FOMC continued to point to its gradual rate hike approach.
• Oil market continue its rebalancing, leading to a stabilisation of the commodity markets. This is supportive for risky assets, particularly emerging debt, high yield and inflation-linked bonds.
• Emerging markets face fewer headwinds, thanks to a stabilisation of commodity prices, a working Chinese stimulus and a cautious Fed.
• Although investor sentiment has improved recently, we remain vigilant, due to a busy political agenda (Regional elections in Spain, constitutional referendum in Italy and the US presidential elections).

REGIONAL EQUITY STRATEGY

• We currently have a neutral weight in euro zone equities (since mid-August). We have decided to introduce 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". The European equity markets are close to key resistance levels. We are positioned to benefit from a potential extension of the recovery
• We have maintained our underweight in UK equities.
• 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.
• We are overweight Emerging markets. Fundamentals are improving and valuation is attractive. A positive turn in flows and an attractive technical set-up shows a re-rating potential. Technical indicators are now bullish and we continue to monitor the important technical levels closely. As India's fundamentals stand out, we have decided to optimise our emerging markets exposure. We have slightly reduced our global emerging markets overweight and reinvested the proceeds in the Indian equity market.

BOND STRATEGY

• 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 have slightly decreased our exposure to high yield bonds, which have had a good run and have reached our target spreads.
  • 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.
• Our long positioning on Emerging market currencies is based on our conviction that the peak in the USD and the low in commodity prices are behind us.

• In the US, the NAHB Housing Market Index rose from 59 in August to 65 in September. This indicator, used to estimate the housing sector, shows an increase of the builders' optimism, viewing sales conditions as good (>50 ) and beats the expectations of an index being at 60.
• The Fed Funds target range remains unchanged, the upper bound staying at 0,5%.
• In July 2016, the euro zone current account (seasonally adjusted) had a surplus of EUR 21bn, which is 8.5 billion lower than the previous one. This decline can be seen as negative. However, the euro zone is still clearly a net lender to the rest of the world.
• There is a decrease in the selling prices in Germany, both on MoM and YoY. Concerning the YoY, this is a smaller decrease than the previous one (-1,6% from one year ago). 

EUROPE

Positive performance for European equities with the Stoxx 600 closing at 345 up by 2.23% for the week.

• European stocks rallied following the Fed non-decision and the new measures announced by the BoJ.
• Later in the week investor confidence waned due to renewed worries that the European economy may not recover as fast as expected.
• European exporter indices (CAC, DAX) outperformed their main US and Japanese peers on a combination of the lower USD (driving European Basic Resources sector nearly 9% higher) and some sector rotation from defensives into cyclicals stocks
• At a country level, UK, Germany and France outperformed the Stoxx 600.
• At a sector level, Basic resources, Insurance and Technology outperformed the benchmark (8.49%, 4.07% and 3.82% respectively) while Health Care (1.17%), Media (0.83%) and Travel and Leisure (-0.55%) underperformed.

US

Slightly positive week for US equities with the S&P 500 closing at 2165 last Friday.

• US equities were boosted last week by the Fed's decision not to raise rates for the moment.
• The small-cap Russell 2000 Index performed best and managed to establish a new high for the year.
• Financials stocks lagged as investors were disappointed that lending margins would not soon increase.
• Utilities and Real Estate saw gains as their high dividend yields remained attractive relative to bonds. Materials and Energy were also boosted by the fall of the USD after the Fed meeting.
• At a sector level, Real Estate, Utilities and Telecoms outperformed the S&P 500 (4.25%, 3.37% and 1.92% respectively) while Financials
  (0.83%), IT (0.42%) and Energy (0.10%) were underperforming.

EMERGING MARKETS

Positive week for Emerging markets with the main index up by nearly 4%.

• The Fed’s decision to leave its interest rates on hold provided a midweek boost to emerging markets.
• Brazilian stocks gained following the Fed’s statement and the rally in oil prices. Equities continued to rally at the end of the week amid speculation that the central bank could lower interest rates sooner than expected.
• Trading turnover remained thin in China, as investors remained cautious ahead of the long National Day holiday starting on Oct. 1, when Chinese markets will close for a week.
• At a sector level, Materials, IT and Real Estate outperformed the index (+4.84%, +4.68% and +4.18% respectively) while Health Care (2.78%), Telecoms (2.71%) and Industrials (2.29%) were all below the benchmark. 

RATES

Once again, central banks took centre stage last week as both the BoJ and the Fed held meetings on Wednesday.

• The BoJ surprised market expectations, as it did not cut rates further into negative territory. It nevertheless introduced a new concept to its current QE, namely "Yield Curve Control", designed at preventing longer-date interest rates from dropping further. This move should help financial institutions and pension funds.
• The Fed delivered a dovish statement, while at the same time leaving all options open for a December rate hike.
• In that context, global bond market remained well supported. The 10Y Bund yield dropped back below zero, while US 10Y treasuries finished the week 10bp lower. 

CREDIT

The main drivers of spreads last week have been the central banks actions.

• The Fed left its key interest rates on hold as expected. Although the FOMC signalled a (likely) December hike, it reassured markets by scaling back its forecasts for future rate hikes.
• The BoJ also gave some support to the markets as it announced it would inject more money until inflation rises above 2% and would maintain the 10Y yield around 0% ("yield curve control").
• There was subdued primary volume at the beginning of the week with around EUR 6.42bn of corporate issuance. 

FOREX

In a context dominated by cautious central banks statements, markets continued to trade on risk-on mode, favouring carry currencies.

• The ZAR, AUD and BRL were the main performer of the week.
• The NOK was also well supported thanks to the Norges Bank revising upward the expected path for its target rate, as well as its inflation forecasts.
• The USD depreciated somewhat against the EUR on the back of a dovish statement from the FOMC suggesting fewer rates hikes in 2017 and 2018. 

COMMODITIES

Over the past week, commodities rebounded slightly, as the GSCI Light Energy rose by 1% and remained positive for the year (+1.3%).

• Oil prices (WTI +6.12%, Brent +4.30%) registered a weekly gain after Saudi Arabia was said to have offered to reduce production if Iran agreed to freeze its output at its current production level.
• Natural Gas on Nymex saw a small increase of 1.4% as most of the United States is seeing above-average temperatures.
• Gold (+2.6% at $1338.9 per ounce) rose to a two week high, heading for a third quarterly gain, the longest rally since 2011, following Wednesday's FOMC meeting.
• Among other precious metals, silver showed the biggest rise last week, climbing 5.5%. Copper and palladium also rose by 1.6% and 3.8% respectively. 

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES