Coffee Break 8/29/2016

Last week, markets focused on Fed Chairman Janet Yellen’s speech at Jackson Hole, signalling that a rate hike this year is still on the table. However, Janet Yellen was vague on the timing of the decision. The Fed's committee will next meets in late September. It also has a meeting in early November, but it seems unlikely that the Fed would raise rates right before the US presidential elections.

Currently, the Fed projects that it would raise rates twice this year, though some officials have only been talking about one increase in recent weeks.

Equity markets did not really respond on the speech last Friday. In this context, we maintain our neutral stance in equities vs. bonds.

Our current investment strategy:

Legend
grey : no change
blue : new change

EQUITIES VERSUS BONDS

We currently have a neutral strategic positioning in equities vs. bonds:

• The "Brexit" has increased the downside risk, but there is no spill over for now, as the growth deterioration remains contained to the UK and early indicators show global growth is little impacted.
• The macroeconomic news flow outside the UK is in line with a sluggish, but positive growth:
  • Continental Europe appears to be resilient.
  • Improving macroeconomic indicators in the US and China mitigate the downside risks on a global scale.
  • We remain nevertheless vigilant, as the depth, duration and diffusion of the "Brexit" confidence shock remains highly uncertain.
• Central banks follow the financial crisis template.
  • 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. At Jackson Hole, Janet Yellen said “that the rate hike case has strengthened in recent months”, while at the same time the FOMC continue to point to their 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 (Russian parliamentary elections, regional elections in Germany, constitutional referendum in Italy and the US presidential elections).

REGIONAL EQUITY STRATEGY

• We currently have a neutral weight in euro zone equities (since Wednesday 10 August). The European equity markets are close to key resistance levels. We are positioned to benefit from a potential extension of the recovery and have therefore neutralised our euro zone underweight.
• We have maintained our underweight in UK equities.
• We have a neutral stance on US equities, as the US market is less impacted and thus more resilient in the current market environment.
• We have a neutral stance on Japan.
• We are overweighed in emerging markets. Fundamentals are improving and valuation is attractive. A positive turn in flows and an attractive technical set-up shows a high re-rating potential.

BOND STRATEGY

• We continue to diversify out of low/negative yielding government bonds:
  • We remain positive on US corporate bonds, high yield bonds and emerging debt, both in local and hard currency.
  • 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.

• In the US, the Commerce Department’s second estimate of Q2-GDP pointed to an annualised growth of 1.1% (slightly lower than the first estimate of 1.2%). The US economy grew by 1% in the first half of 2016.
• According to the Commerce Department, new orders for US manufactured goods (1.6%) rose in July for the second consecutive month, lifted by a 10.5% jump in demand for transportation equipment.
• In the euro zone, economic activity during August edged up to a seven-month high with the Markit flash composite PMI rising to 53.3 from July’s 53.2, while a Reuters poll of economists predicted a slight dip. The biggest surprise came from France, which displayed strong growth thanks to an upturn in the service sector.
• In the meantime, the “Brexit” has impacted German business morale. The Ifo economic climate index fell to 106.2 in August, from 108.3 the month before, posting its steepest monthly drop since the height of the euro zone debt crisis in 2012.

EUROPE

Positive performance for European equities with the Stoxx 600 closing at 343 up by 1.05% for the week.

• European markets generally traded within a tight range during the week.
• Sectors were volatile, with health care, German automobiles and mining stocks fluctuating on consumer and market news throughout the week.
• Along with the weak Italian banking sector and the "Brexit" aftermath, Portugal’s slow growth poses another looming threat to the stability of the financial system in Europe.
• At a sector level, Banks, Chemicals and Constructions & Materials outperformed the benchmark (0.34%, -0.38% and -0.65% respectively) while Financials services (0.34%), Food & Beverages (-0.38%) and Health Care (-0.65%) underperformed.

US

Negative week for US equities with the S&P 500 closing at 2169 last Friday.

• US stocks went south last week after news of an imminent Federal Reserve rate increase.
• In response to Janet Yellen’s favourable assessment of the labour market and inflation patterns, equities went initially up. But they reversed their course once investors focused on a rate increase following better economic.
• Better new home sales data (+12.4% in July, a nine-year high) boosted market early in the week but stocks fell back later on, with health care stocks suffering a particular blow from renewed attention to drug pricing.
• Controversy over steep increases in the price of the EpiPen, which is used to treat severe allergic reactions, weighed on the shares of maker Mylan as well as the health care sector as a whole.
• At a sector level, Financials, IT and Materials outperformed the S&P 500 (0.36%, 0.04% and -0.56% respectively) while Energy (-1.34%), Health Care (-1.80%) and Utilities (-2.28%) were underperforming.

EMERGING MARKETS

Emerging markets showed their first weekly drop in more than a month last week.

• Turkey weakened after a car bomb killed at least eight people at a police headquarters in the southeast.
• Brazil also dropped more than 2% due to the weakness of commodity prices even though the sentiment in the market in general is becoming positive as Dilma Rousseff impeachment vote nears.
• Taiwan showed some strength led by technology stocks as the date of the new iPhone’s launch approaches.
• At a sector level, Consumer Discretionary, Utilities and Consumer Staples outperformed the index (-0.21%, -0.44% and -0.45% respectively) while Telecoms (-1.46%), Materials (-1.86%) and Industrials (-1.97%) were all below the benchmark.

RATES

Very calm week on global sovereign markets with primary market and central banks activity limited.

• At Jackson Hole Janet Yellen said “that the rate hike case has strengthened in recent months”, while at the same time the FOMC continue to point to their gradual rate hike approach.
• In Europe, the flash PMI’s for August continued to show resilience to the "Brexit" outcome, but some sub-components (business expectation of service sector) were less upbeat.
• In Portugal, an agreement “in principle” was reached with the European Commission on Caixa Geral’s recapitalisation, leading to a large government capital injection of up to EUR 2.7 bn.
• Global sovereign yields ended the week close to last week levels.
• 10Y US, UK, Japan and German yields now stand at respectively 1.54%, 0.54%, -0.09% and -0.08%. Non-core yields were also stable with Spanish and Italian 10Y yields standing at respectively 0.91% and 1.10%.

CREDIT

Another relatively quiet week for credit markets as investors were waiting for the Jackson Hole meeting results.

• Investment Grade Credit spread tightened by 1bp to 107bp over Government bonds.
• Credit derivatives were slightly tighter (main unchanged; X-over -2bp; Senior Fin -3bp and Sub Fin -1bp).
• Financials remained supportive across the capital structure: the new AT1 issue from Barclays in USD (yield of 7.75%) showed strong investors’ appetite (more than 10x oversubscribed).
• Supply in EUR Non-financials was close to zero (Atlas Copco was the only issue in EUR with a 10-year deal at mid swap+37bp).

FOREX

It was a quiet week in FX space, as markets were all focused on the annual central banks gathering in Jackson Hole.

• In that context, the GBP continued to retrace its previous losses against the USD and the EUR
• The EUR/USD parity remained range-bound.
• The AUD and the NZD benefitted from their “high-carry” appeal in a low volatility environment.
• The ZAR was the only currency to depreciate massively, as political headlines took centre stage.

COMMODITIES

Over the past week, commodities lost some grounds, as the GSCI Light Energy was down by 2.4%. The index remains nonetheless positive for the year (+2.5%).

• Both crude oil and Brent prices continued to rise on the back of US and Iran military tensions, as well as speculation the USD could fall on a monetary policy speech due from the Fed.
• Natural gas prices rose last week by close to 6%, buoyed by a smaller than expected weekly climb in US supplies, as warmer weather lifted domestic demand prospects for the commodity.
• Wheat, soybean and corn prices plummeted last week, amid expectations for strong global grain supply.

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES