Coffee Break 2/13/2017

Investors warmly welcomed the relaxation of regulatory constraints in the financial sector and the tax reform announced by Donald Trump but it appears that these measures should take some time before coming into effect. Therefore, financial markets are currently not moving much on the so-called Trump trade. But three driving forces are sustaining risky assets:

• The on-going Q4 2016 earnings season confirms the end of the earnings recession in the US and Europe.
• The economic momentum at the turn of the year continues to be solid and synchronised throughout all regions.
• Central banks continue to be accommodative.

In this context, we maintain our positive view on US, euro zone and Japanese equities.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

We remain overweight in equities versus bonds:

• The macro news flow is still well-oriented. Global growth is expanding in a synchronised way combined with a potential of US reflation through fiscal stimulus, tax cuts, and regulatory easing in a robust labour market context.
• Central banks are decoupling but they mostly keep a dovish stance:
  • The ECB will keep a steady hand given political uncertainties and will extend its quantitative easing at least until December.
  • Waiting for more clarity on fiscal stimulus, the Fed is in no hurry to hike its rates. Its tightening cycle is at odds with accommodative policies in Japan, the euro zone and the UK. Markets are pricing two Fed hikes in 2017 and another two in 2018, below the median Fed projection.
• Equities have an attractive relative valuation compared to credit, and their expected return should be boosted by the end of earnings recession in the US and Europe.
• Oil markets continue their rebalancing after the OPEC agreement. However, US rigs have been re-opening, implying a greater production which could likely weigh on oil prices.
• Important political risks nevertheless remain: upcoming elections in Europe (The Netherlands, France and Germany) and “Brexit” negotiations. Moreover, the wide range of possible outcomes of Donald Trump’s presidency includes the risk of policy error. Slippage in the timing of the fiscal stimulus appears to be a new source of uncertainty.

REGIONAL EQUITY STRATEGY

• We have maintained our overweight on euro zone equities, as we expect a gradual improvement from the high discount due to political uncertainties. Recent surveys point to some acceleration in activity.
• We have maintained our underweight in UK equities as the uncertainties surrounding the conditions of “Brexit” and its impact on the economy are nowhere near resolved. We avoid domestically-oriented small and mid-caps and still have a relative value strategy long FTSE 100 against a short FTSE 250.
• We are overweight on US equities. Sound consumer expenditures consolidating oil prices and a post-election stimulus should support an improving US earnings outlook.
• We are positive on Japan. The country benefits from an aggressive domestic policy mix, stronger US growth and a weaker currency. Furthermore, the Bank of Japan has kept its stimulus unchanged, leaving its target on 10Y Japanese government bond yields around zero and upwardly revised its growth forecasts to 1.4% for the current fiscal year, and to 1.5% for next year. They have mentioned the US economy as the main foreign threat due to concerns over Donald Trump’s policies.
• We have maintained a neutral positioning on emerging markets.

BOND STRATEGY

• We have maintained a significant duration underweight as we expect stronger inflation figures and US fiscal policy easing to push bond yields higher.
• We continue to diversify out of low/negative yielding government bonds:
  • We have implemented a new relative value strategy: long German Bund / short French OAT due to increasing uncertainties surrounding the French presidential election. We also see the strategy as a hedge against the European political risk.
  • We took our profits on our relative value strategy: long Italian BTP / short Spanish Bonds.
  • We remain positive on inflation-linked bonds. We expect the recent rise in inflation expectations to be sustained as wages and consumer price inflation data continue to rise gradually, led by the US. In addition, upcoming fiscal easing looks likely. The expected re-rating of inflation protected bonds is now well underway.
  • We have a slight overweight in emerging market debt, both in local and in hard currency terms.
  • We are slightly positive on high yield, even as the significant spread tightening has reduced the potential, the carry remains attractive.

• In the US, initial jobless claims declined to a seasonally adjusted 234,000, near a 43Y low of 233,000 touched in early November, amid a further tightening of the labour market.
• US consumer confidence dropped for the first time since the election of Donald Trump. The preliminary Michigan sentiment index for February slipped from a 12Y high in January to 95.7.
• The Sentix euro zone confidence index fell to 17.4 in February from 18.2 in January due to concerns that Donald Trump’s policy course would weigh on the global economy.
• In Germany, industrial production fell by 3% on the month due to weaker output in manufacturing and construction. This was much lower than the consensus forecast in a Reuters poll for a rise of 0.3% and the steepest drop since January 2009. 

EUROPE

Slightly positive week for European equities with the Stoxx Europe 600 up by 0.91%

• Most of the European stock indexes ended the week higher, with earnings results from key companies helping to boost gains.
• Despite building political uncertainties around the upcoming French presidential election, stocks climbed gradually throughout the week.
• Figures on retail growth in France and stronger factory orders in Germany helped to support markets.

US

Positive week for US stocks with the S&P 500 closing at 2316 on Friday.

• Shares rose for the week, bringing all the major benchmarks to new highs.
• The only exception was small-caps, which, ended on a sour note.
• After trading sideways through most of the week, stocks broke out on Thursday following a new statement from President Trump on a coming new tax plan.

EMERGING MARKETS

Chinese trade data and impending US tax cuts lifted emerging stocks to a new five-month high last Friday.

• At the beginning of the week, the stock market fell against the resurgent USD after France’s election campaign added to fears of political risk, with far-right National Front leading polls.
• But the market sentiment started to change as China posted much stronger-than expected trade data for January as demand picked up at home and abroad.

RATES

Greece was again in the spotlight last week.

• The IMF affirmed that Greece needed more debt relief in order to make the economic situation more sustainable, while euro zone governments described this view as “unnecessarily pessimistic". This boosted volatility on rates of non-core countries.
• Donald Trump announced a tax reform for both corporates and households. This announcement made global US rate move upward.
• 10Y US, UK, Japan and German yields stood at respectively 2.41%, 1.26%, 0.07% and 0.31%.

CREDIT

Spreads on corporates and financials slightly widened last week.

• As investors keep reassessing the European political risk, spreads on corporates and financials slightly widened last week (by 1bp).
• The trend was similar on the synthetic market.
• The primary market was active especially for financials with the Tier 2 issuances of CaixaBank and ING Group and the launch by SEB of a senior green bond.

FOREX

Global outperformed of the USD last week.

• The SEK and NOK were the worst performer with mitigated macroeconomic news.
• Regarding Emerging Markets currencies, the BRL and MXN held up well against the USD.

COMMODITIES

Positive week for commodities with the GSCI Light Energy up by 1.29% (+3.61% YTD).

• Energy mostly declined last week, after inventories revealed a large and unexpected build, with heavy imports from OPEC countries.
• Base metals mostly declined in Shanghai, but were mixed in London.
• Precious metals mostly outperformed despite the strengthening USD. 

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES