Coffee Break 09.04.2018

Nonfarm payrolls increased by just 103K in March while 193K new jobs were expected. The market reaction was muted, focusing more on trade issues. The longer term trend of strong growth looks intact. Also inflation was of little worry as the average hourly earnings rose at an annualized pace of 2.7%. For sure, the upside is that a lower-than-expected jobs report eased any remaining concerns over aggressive interest rate hikes. The Fed will carefully gauge what the economy can handle in terms of monetary tightening.

Trump is still “renegotiating” trade deals with China. The trade spat is getting uglier as it is uncertain which side can really better handle the consequences. Economically speaking, China might have more to lose because the local economy is export-driven. But a trade war is also political. On one side, Xi Jinping seems to be in place for life while Donald Trump on the other hand faces mid-term election this year. Party seats are at risk if he puts in jeopardy his own agricultural sector. Geopolitically speaking, China’s influence and allies in the region are undeniable - and unavoidable. Asian Emerging markets should not be underestimated in this context.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

On the short term, we see a less favourable risk-reward momentum. We maintain our neutral stance on equities and we decrease our Japanese equity exposure to neutral.

• Global growth momentum outside the US is likely to have peaked.
• Global monetary tightening is progressive, but the US are tightening first; given the accommodative fiscal policy.
  • The Federal Reserve started its balance sheet reduction in October 2017, hiked in December 2017 and in March 2018.
  • The ECB has recalibrated its programme, buying less bonds as of January. A rate hike should not occur before 2019.
• The escalation of tensions on global trade represent a new development and a major uncertainty.

REGIONAL EQUITY STRATEGY

• We maintain our neutral stance on Eurozone equities. Recent data show the first signals of a lower cyclical growth. The economic expansion in the region remains solid, but markets’ expectations have increased, and this is more likely to lead to disappointments.
• We are underweight on Europe ex-EMU equities. There is less than one year to set up new trade relations during the “Brexit” negotiations and little progress has been made since the start of the year. A hawkish BoE monetary policy stance has put a barrier to GBP depreciation, challenging overseas profit growth.
• We took a partial profit on our US equity exposure. The US policy mix is evolving as fiscal policy becomes more accommodative and monetary policy more restrictive. We note that economic activity has further accelerated at the turn of the year implying that the growth/inflation mix is not deteriorating yet.
• We have trimmed our Japanese exposure towards neutral. The global risk-off mode is a support for the safe haven JPY. The Bank of Japan confirmed its dovish stance and should not join other central banks in tightening its monetary policy anytime soon but this has yet failed to weaken the currency.
• We keep our overweight exposure to emerging market equities as they benefit from improving fundamentals, favourable sector composition and stronger growth. But, they remain vulnerable to an escalating trade conflict. We keep our eyes on the budding trade war.

BOND STRATEGY

• We are underweight on bonds and keep a short duration
• With a tightening Fed and expected upcoming inflation pressures, we expect rates and bond yields to show an uptrend towards 3% on the 10Y US government debt. In addition to rising producer prices, rising wages, fiscal stimulus and tariffs on trade could push inflation higher. The Fed will continue its hiking cycle beyond March.
• The overall improvement in the European economy could also lead EMU yields higher over the medium term (towards 0.9% on the Bund). The ECB remains dovish in its Quantitative Easing plans and is opposed to a strong euro.
• We have a neutral view on credit as spreads have already tightened significantly and a potential increase in bond yields could hurt performance.
• The on-going monetary easing represents an important support for emerging market debt. 

• In the US, non-farm payrolls increased by just 103K in March, following an upwardly revised 326K in February. It is the lowest reading since September and well below market expectations of 193K.
• The Institute for Supply Management’s Manufacturing PMI in the US fell to 59.3 in March 2018 from the previous month's near 14-year high of 60.8, and missing market expectations of 60.1. New orders, output and employment rose at a softer pace.
• The IHS Markit euro zone Composite PMI came in at 55.2 in March 2018, little-changed from a preliminary estimate of 55.3 and below February's 57.1. The reading pointed to the weakest pace of expansion in the private sector since January 2017.
• The euro zone consumer price inflation is expected to pick up to 1.4% YoY in March from the previous month's 14-month low of 1.1%, and in line with market forecasts. Prices of services and food, alcohol & tobacco should rise at a faster pace. 

EUROPE

Volatile, but positive week for European equities.

• European stocks weathered a volatile week as trade hostilities between the US and China escalated.
• The pan-European Stoxx600 index ended the week higher due to a rally on Thursday that produced the biggest one-day percentage gain in nearly two years, according to FactSet data.
• Country wise, Germany’s export-heavy index DAX 30 and France’s CAC 40 ended the week higher.

US

Volatile week for US equities.

• Consumer discretionary and Energy stocks fared best last week, while Healthcare, Industrials, and Technology shares lagged.
• Amazon has again been under attack by the tweets of President Trump and the company fell again in Friday’s broader sell-off.
• Trade tensions between China and the US continued to dominate sentiment and stocks sold off sharply throughout the week.

EMERGING MARKETS

Slightly negative week for emerging equities.

• Emerging stocks rose off two-month lows on Thursday after the United States voiced willingness to negotiate a resolution to an worsening trade dispute with China.
• The escalating tensions have sent tremors through global markets in recent days, mainly for tech stocks.
• Mexico rose the most amongst its peers as US and Mexico are expected to be reaching a preliminary deal on the North American Free Trade Agreement in the near future. 

RATES

Rising US treasury yields last week.

• US treasury yields moved higher over the past week as some of the noise around the Trump trade war persisted and better inflation and growth data prevailed.
• In the euro zone, German yields were volatile as a sharp rise (on the back of US treasuries) was followed by a fall following some weakness in the European stock markets.
• After a strong period of performance in March, peripherals markets saw some weakness, with Spanish, Italian and Portuguese rates on the up.
• 10Y US, UK, Japan and German yields stood at respectively 2.79%, 1.40%, 0.046% and 0.50%.

CREDIT

Turbulent and volatile week for credit markets.

• Credit markets witnessed yet another turbulent and volatile week as the Trump protectionist rhetoric was met by a reciprocating China.
• In spite of this, credit markets were relatively resilient with more activity on primary and secondary markets, especially on the short end of the curve.
• The cash bond markets that saw some spread narrowing all the same, particularly on the EUR High Yield market which ended at + 312 bps, while EUR Investment Grade cash bonds were relatively stable (at +96 bps).
• The derivatives markets saw some respite from the previous week with Itraxx main moving lower to 58 bps and the Itraxx xover reaching 286 bps. 

FOREX

Weakening safe haven currencies.

• As trade wars tensions eased slightly last week, safe haven currencies weakened (JPY and CHF) and commodities currencies gained (CAD, NZD, NOK, AUD) vs the EUR.
• Furthermore, the CAD was pushed higher by the positive tone of the current NAFTA negotiations.
• The EUR finished the week slightly lower vs the USD. 

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES