Coffee Break 19.03.2018

Risky assets and yields are under the pressure of increasing geopolitical tensions, i.e. the latest development between the United States and China. In state-controlled press, one can read that even though China has tried to avoid a trade war, once it breaks out, appeasement would not be an option.

And what could bring broader negative side effects than the announced US steel and aluminium tariffs? Recent rhetoric and changes made in the US administration, notably the Secretary of State and the Director of the National Economic Council. This all point to a more aggressive stance against China. The trade statistics reveal that 43% of the US goods deficit is with China, 44% is in tech products and 27% is in tech products with China. As the FOMC convenes under its new Chair, Jerome Powell, a hike in the Fed funds rate this Wednesday is already priced-in by markets. Protectionist measures would likely push 2018 and 2019 median dots higher.

We continue to see a less favourable risk-reward and look for an entry point to increase risk exposure.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

We continue to see an underlying favourable background and look for an entry point to increase risk exposure.

• Global growth momentum outside the US is likely to have peaked.
• Global monetary tightening is progressive, but the US are tightening first:
  • The Federal Reserve started its balance sheet reduction in October, hiked in December and should continue its hiking cycle in March.
  • The ECB has recalibrated its programme, buying less bonds as of January. A rate hike should not occur before 2019.
• Geopolitical risks remain an obstacle.

REGIONAL EQUITY STRATEGY

• We have reduced our euro zone equity exposure to neutral. 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 have kept a neutral –tactical- stance on emerging markets equities.
• We have become negative on UK equities. There is less than one year to set up new trade relations in the “Brexit” negotiations and little progress has been made since the start of the year. A hawkish Bank of England monetary policy stance has put a barrier to GBP depreciation, challenging overseas profit growth.
• We remain neutral on US equities. 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 are positive on Japanese equities. 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 fails to weaken the JPY. The visibility on the accommodative policy mix and an above-potential expansion is good news.

BOND STRATEGY

• We reduced our duration by a further 0.25Y
• We are negative on bonds and keep a low duration.
• With a tightening Fed and expected upcoming inflation pressures, we expect rates and bond yields to continue their uptrend towards 3% on the 10Y US government debt.
• 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 positive stance on emerging market debt, as the on-going monetary easing represents an important support.
  • We are neutral on high yield. 

• In the US, the University of Michigan’s consumer sentiment was published at 102, its strongest reading since January 2004. It is the gauge of current conditions and survey households on the improvement of their overall economic situation.
• In the euro zone, core consumer prices increased by 1.1% YoY in February, lower than the market expectations of 1.2%.

EUROPE

Mixed week for European markets.

• With low trading volumes, disappointing inflation numbers and political uncertainties over a potential trade war, European shares disappointed last week.
• Germany's DAX ended the week on a positive note following the first listing of Siemens heath division, Siemens Healthineers.
• The UK stock market dipped, following a report by the OECD that forecast Britain would miss out on buoyant global economic growth over the next two years following its exist from the European Union.

US

Negative week for US Stocks.

• After a four-day losing streak, markets saw a small rally on Friday but the S&P's 500 ended nonetheless the week on a loss.
• Small and mid-caps outperformed larger ones.
• Within the S&P 500, Utilities and Real estate fared best, helped by a decline in longer-term Treasury yields.
• Markets were also unsettled by the dismissal of Secretary of State, Rex Tillerson, widely viewed as a free trade advocate.

EMERGING MARKETS

Emerging market equities recorded small gains for the week.

• Concerns over a possible trade war came to the fore again after the US administration pressed China to cut its trade surplus.
• Rising diplomatic tension between the UK and Russia also casted a shadow on markets.
• Russia had a difficult week just before the presidential elections on Sunday, in which President Vladimir Putin faces no credible threat.
• In South Korea, the local market reached a five week high on the back of easing geopolitical tensions and optimistic US economic data.

RATES

Core euro zone government bonds were in a flight-to-safety mood last week.

• The Bund was back under 0.60% last week while Italy’s BTP continued to appreciate despite a still unclear political landscape.
• In the US, all eyes will be turned to the dot plots this week with the first FOMC for Jerome Powell.
• 10Y US, UK, Japan and German yields stood at respectively 2.81%, 1.44%, 0.046% and 0.59%.

CREDIT

Huge activity on the primary market last week.

• Around EUR35bn were issued last week and this lead to a widening of spreads.
• Sanofi’s six-part deal was one of the highlight of the week, raising EUR8bn.
• Cash market underperformed however with credit spreads widening by 5 bps for Investment Grade and 2 bps for High Yield.
• Regarding derivatives, the iTraxx Main and Xover tightened by 1.7bps and 4.5bps respectively.

FOREX

The NOK was the winner of the week.

• Positive week for the NOK as the Norges Bank upgraded its rate projection and it is expected now that a rate hike could occur after the summer.
• The EUR/USD cross was stable on the week.
• The JPY was up last week as bonds yield went lower in major zones.
• The CAD weakened as the Bank of Canada made some dovish comments on monetary policy. The AUD and the NZD also weakened on lower commodity prices.

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES