Weekly Insights 30.10.2017

Last week, equity investors focused on the much awaited ECB-meeting. Chairman Mario Draghi did not disappoint investors with his delicate asset purchase reduction announcement. As of January 2018, the ECB will no longer buy EUR 60 billion a month, but EUR 30 billion, while extending the program by nine months. Market impact was in line with our expectations with a USD appreciation and a relative outperformance of EMU and Japanese equities following the announcement.
In the meantime, the US Q3 earnings season is ongoing. A stronger growth US and globally are reflected in the published results, as the percentage of companies in the S&P beating earnings estimates (76%) is above the five-year average.
The next milestone is the announcement of the future US Fed Chair. Janet Yellen and Kevin Warsh are seemingly out of the race, leaving Jerome Powell and John Taylor as possible candidates.
In Germany, Angela Merkel began discussions, last Wednesday, to establishing a new coalition with the pro-business Free Democrats and the Green Party. All three parties met again on Friday.

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.
  • 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 stimulus will fade gradually:
  • The Fed is starting its balance sheet reduction this month.
  • The ECB announced last Thursday that it will start its balance sheet reduction next January.
  • Overall, central banks are confident on the synchronised global growth context and are prudently adopting a tightening bias.
• 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 add the US to the list, where the monetary policy uncertainties due to the upcoming reshuffle of the Board of Governors of the Federal Reserve adds to the fiscal policy uncertainties. Janet Yellen and Kevin Warsh are supposedly out of the race leaving Jerome Powell and John Taylor as possible candidates. Donald Trump would be the first President to not retain the incumbent Fed Chair since Jimmy Carter though.

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.
• 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. Nevertheless, on the policy mix, we see progress on fiscal stimulus along with a tightening Fed. 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.

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, economic growth exceeded expectations, even after the hurricanes disrupted activity in some parts of the country. Q3 GDP growth came in at 3% annualised, thanks to strong consumer and business spending.
• Sales of new single-family houses jumped by 18.9%, the largest percentage gain since 1992.
• In the euro zone, economic activity continues to expand at a fast pace with the preliminary PMI manufacturing at 58.6, while the PMI services reached 54.9.
• In Germany, business confidence remains at an all-time high as the IFO business climate index rose to 116,7 in October, after two consecutive declining months.

EUROPE

European indices ended the week higher following excellent earnings results throughout most sectors.

• The CAC 40 outperformed helped by strong results from Safran, Essilor, Total and Airbus following their deal with Bombardier.
• The SMI underperformed significantly, dragged by Novartis and UBS.
• The IBEX also underperformed dragged by the banks on numerous negative/positive headlines throughout the week before the Catalan regional parliament voted to unilaterally declare its independence on Friday.
• On the sector side, Household and Personal Goods significantly outperformed on a lower EUR and results by LVMH. The entire luxury sector also jumped after strong results from Kering and Luxottica.
• The Automobile sector outperformed on Friday as Volkswagen lifted its 2017 profits target.

US

Seventh consecutive weekly gain for the S&P 500.

• Most of the major benchmarks ended the week higher after the release of Q3 earnings reports from 180 of the S&P 500's constituents.
• A number of big tech firms (Amazon, Alphabet, Microsoft, Intel) announced well-received Q3 results last Thursday which boosted the sector and the technology-heavy Nasdaq Composite Index.
• Strong results from Caterpillar, 3M, General Motors and Corning provided a boost to the industrials sector and to the overall market.
• On the negative side, Mattel and JC Penney results were below consensus and guidance and both stocks plummeted on Thursday.
• The health care sector also lagged as investors were disappointed by sales trends from some major drug makers.

EMERGING MARKETS

Disappointing week for Emerging Markets equities.

• Mexico weakened on lingering uncertainties over the US monetary policy and concerns about the nation’s trade ties with the United States.
• Brazil had a difficult week after the house of representatives once again shielded the President Michel Temer and two of his ministers from being prosecuted on corruption allegations.
• South Korea shares rallied to end at another all-time high on Friday, as signs of an improvement in ties between Beijing and Seoul helped to brighten market sentiment.
• On the other hand, Asian and technology shares suffered from rising USD and US Treasury yields. 

RATES

Better US macroeconomic data with strong and better-than-expected PMI prints drove treasury yields higher.

• In Europe, the ECB announced further tapering of its QE, starting next January.
• However, the tapering continues to remain open-ended (with no pre-set end date) and the rhetoric was quite dovish, sending core and peripheral yields lower.
• Some political issues were witnessed in Spain, following the Catalan Parliament declaring independence, which will be important to monitor.
• In the UK, positive growth figures increase the chances for the BoE to hike rates.
• 10Y US, UK, Japan and German yields now stand at respectively 2.45%, 1.37%, 0.063% and 0.40%.

CREDIT

Quiet week for credit markets.

• No significant changes for credit markets as the political pressures were more than compensated by the ECB’s dovish stance.
• In Europe, Cash spreads narrowed very slightly, with the Investment Grade index continuing its slow positive trend to stand at 92 bps.
• The synthetic market on the other hand narrowed sharply after the “dovish tapering” announced by the ECB on Thursday. The Itraxx Main and Itraxx Xover declined to 52 bps and 233 bps respectively.

FOREX

A dovish ECB sent the EUR down last week.

• The EUR declined sharply following the ECB meeting as the ECB rhetoric disappointed partially the markets and pulled the EUR/USD to below 1.160 on Friday.
• The GBP climbed higher over the week on the back of rate hike expectations by the BoE.
• Strong data combined with expectations on the next Fed chairman and US tax reforms supported the USD over the course of the week. 

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES