Weekly Insights 11/6/2017

Central banks were at the forefront last week. Following its meeting on Thursday, the Bank of England has increased interest rates for the first time in a decade, raising its base rate by 0.25% to 0.5%. The BoE governor Mark Carney intended to send a hawkish message that at least two further hikes would be needed over the next two years to bring inflation back to target. However, the BOE left its quantitative easing target unchanged at £435 billion.
In the US, Jerome Powell was nominated as the next Fed chair once Janet Yellen’s term expires on 3 February 2018. Investors warmly welcomed this announcement as Jerome Powel is likely to provide monetary policy continuity by adopting Janet Yellen's framework of gradually normalising rates and predictably reducing the Fed's balance sheet.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

We are positive on equities and remain negative on bonds, maintaining a short duration:

• Global economic momentum is accelerating further with economic news-flows surprising on the upside, adding to the ongoing good earnings season.
  • We concentrate our portfolio’s regional positioning on the euro zone, Japan and the Emerging markets. While we are positive on Japan, we suspect that Emerging Markets could face some headwinds if the USD strengthens.
• Central bank divergence becomes more obvious:
  • The Fed has started its balance sheet reduction and forecasts another rate hike in December.
  • Although, the ECB has announced that it would start its balance sheet reduction next January, asset purchases will continue for at least 3 quarters in 2018 and interest rates increases should not happen before the second semester of 2019.
• Equities have an attractive relative valuation compared to credit.
• The main risks for equity markets remain (geo)political, with different degrees (i.e. Catalonia and North Korea). We added the US to the list as the debt ceiling and government funding issues are looming by mid-December.

REGIONAL EQUITY STRATEGY

• We remain positive on euro zone equities which are supported by a strong economic and earnings momentum and relatively attractive valuations. The recent decline of the EUR/USD provides additional support, confirmed by the latest earnings reports, which were in line with analysts’ targets.
• We have kept a neutral tactical stance on emerging markets equities, as a result of the USD stabilisation and technical indicators.
• We remain negative on UK equities. Beyond the difficult “Brexit” negotiations, the shift in the BoE’s monetary policy stance has put a halt to GBP depreciation, weakening the repatriation of overseas profits realised by UK corporates.
• We remain neutral on US equities. There is an execution risk in the announced fiscal stimulus and pro-growth policies. We note that the House and the Senate Budget Committees both approved versions of the FY 2018 budget that included general directions to act on tax reform.
• We are positive on Japanese equities. A strengthening growth and a supportive domestic policy mix are among the main performance drivers and we have gained more conviction that the Bank of Japan will not join other central banks in tightening its monetary policy anytime soon, which should ultimately lead to a weaker JPY. Furthermore, Japanese earnings remain positive so far without depreciation of the JPY.

BOND STRATEGY

• We are negative on bonds and have a low duration. We expect rates and bond yields to resume their uptrend, driven by a tightening Fed, and potential upcoming inflation pressures. The improvement in the European economy could also lead EMU yields higher.
• We continue to diversify out of low-yielding government bonds:
  • We have a neutral view on credit, as spreads have already tightened significantly and a potential increase in bond yields could hurt performance.
  • We have a diversification in inflation-linked bonds.
  • We keep our diversification to emerging market debt, as the on-going monetary easing represents an important support.
  • We are more or less neutral on high yield. 

• In the US, non-farm payrolls increased by 261,000 in October following an upwardly revised 18,000 gain in the prior month, but were below the consensus estimate.
• The US manufacturing ISM index fell to 58.7 in October, from 60.8 the month before and was just below consensus expectations of 59.5. The manufacturing sector slowed last month but remained steady after disruptions from two major storms.
• The euro zone economic recovery continued with a YoY growth reaching 2.5% in the third quarter while the unemployment reached its lowest level since January 2009 at 8.9% in September.
• In the meantime, the inflation remained subdued, falling by 0.1% to 1.5% as rising food prices failed to offset cheaper energy costs.

EUROPE

European indices ended the week slightly higher.

• Euro zone shares did better than European ones last week, driven by Q3 earnings.
• The DAX significantly outperformed, led by Volkswagen, Daimler, BMW and Bayer.
• The CAC 40 was the worst performer dragged by Sanofi, BNP and SocGen.
• Automobiles, Oil & Gas and Basic Resources traded higher lifted by a leg higher in SUV sales, crude oil and industrials metals.
• The retail sector slumped, dragged by the weak Q3 results from UK clothing retailers Next and Marks & Spencer.

US

Mixed week for US equities.

• Large-cap indexes outperformed last week with the S&P 500 managing to extend its string of weekly gains to eight while the small-cap indexes recorded losses.
• Technology, Energy, and Real estate led the gains within the S&P 500, while Materials and Consumer discretionary lagged.
• Apple reported Q3 results that exceeded analysts' expectations and provided a particular boost to the technology-focused Nasdaq Composite Index.
• The analytics firm FactSet continue to expect an overall slowdown in earnings growth, with profits for the S&P 500 rising by roughly 6% YoY, as compared with double-digit gains in the first half of 2017.

EMERGING MARKETS

Emerging markets stocks headed for a solid weekly rise as manufacturing activity data in both developed and emerging markets showed continued expansion.

• South Korea shares rose to a record high, following the news that Seoul and Beijing agreed to normalise relations.
• Turkey’s lira, on the other hand, racked up some of the biggest losses after data showed inflation spiked by more than expected with annual price increase hitting a 9Y high at 11.9%.
• Brazil also had a difficult week as investors fretted over President Michel Temer’s ability to pass belt tightening measures. 

RATES

The Bank of England raised its key rates for the first time in a decade.

• Last Thursday, the BoE raised its key rates from 0.25% to 0.50% but maintained a dovish stance.
• S&P has unexpectedly upgraded Italy’s sovereign rating from BBB- to BBB, with a stable.
• 10Y US, UK, Japan and German yields stood at respectively 2.33%, 1.25%, 0.045% and 0.35%. 

CREDIT

Credit markets were well oriented last week

• The upgrade of Italy and some Italian banks by S&P, boosted credit markets, especially high Beta financials.
• In Europe, cash spreads narrowed, with the Investment Grade index continuing its slow positive trend to stand at 87 bps.
• The synthetic market narrowed as well (especially the High Yield market) after the “dovish tapering” announced by the ECB. The Itraxx Main and Itraxx Xover declined to 49 bps and 224 bps respectively.

FOREX

Flattish week for the EUR vs the USD.

• The USD has been trading sideways through most of the week, but declined slightly on concerns that the corporate tax reform may be phased in on the long term rather than immediately.
• The Bank of England delivered a dovish hike last week as inflation peaked at 3%.
• A lack of hints as whether the next rate increase would not come any time soon sent the GBP down. 

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES