Coffee Break 5/7/2018

Last week, investors fled both emerging equity and bond markets as the USD strengthened. 
Meanwhile, in the US, Treasury yields were no longer rising. While economy activity keeps expanding and the labour market keeps improving, the Federal Reserve met and left its interest rate unchanged. Slightly more dovish than expected, it is pointing towards a tolerance of a temporary overshooting inflation as the last FOMC statement mentioned a “symmetric 2% objective”.

Trade conflict remained a topic last week, as two days of US-China trade discussions showed little progress and brought just an agreement to continue the talks.

This week will bring a sense of direction for bond yields and the USD as US inflation data for April and preliminary consumer sentiment for May will be published. In an unusual format, Japan PM Abe is also due to host South Korean President Moon Jae-in and Chinese Premier Li Keqian to discuss regional issues. We are looking for some take-away in terms of geopolitical risk, trade and growth impulse in Asia. 

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

We have kept our exposure to equities unchanged but we are looking for an entry point to increase risk exposure as we expect an underlying favourable background

• Growth beyond the 1st half of 2018 should remain solid, self-sustained and synchronised in developed and emerging markets.

• We expect a gradual rise in inflation, but no inflation fear.
• Global monetary tightening is progressive. Outside of the US, other developed markets central banks are in no hurry to tighten. 
• The good start of the Q1 earnings season has supported equity markets.
• However, we note an increase in downside risks: macro momentum is peaking, monetary normalisation is accelerating in the US and concerns about protectionism remain.

REGIONAL EQUITY STRATEGY

• We are neutral on the euro zone. The region still displays a robust economic expansion but activity indicators show some signs of weakness. The ECB remains accommodative, and is not in a hurry to become hawkish. Corporate earnings momentum has weakened and euro zone equities currently lack new catalysts, not only a weaker currency.
• We are underweight Europe ex-EMU equities. The Bank of England’s monetary policy stance has put a barrier to GBP depreciation and we expect a further firming of the currency, challenging overseas profit growth. “Brexit” negotiations remain a risk, while negotiations on new trade relations are stalling. UK profit growth expectations have slightly been revised upwards since the start of the year but still register lower expected earnings growth and thus lower expected returns than the continent, justifying our negative stance.
• We have a neutral stance on US equities. We acknowledge, the improving earnings growth and the positive impact of Donald Trump’s tax and deregulation. Nevertheless, the US trade policy is a major policy unknown. 
• We keep our Japanese exposure to neutral. Visibility on an accommodative policy mix and an above-potential expansion remain positive for Japan. The recent currency weakness is a support for the stock market which remains highly correlated to the performance of the JPY. 
• The emerging market debt faces headwinds due to the strengthening USD and we believe spreads can tighten further. The carry is among the highest in the fixed income universe. It is an attractive diversification vs other asset classes.

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 continue their uptrend. In addition to rising producer prices, rising wages, fiscal stimulus and trade tariffs could push inflation higher. 
• The overall improvement in the European economy could also lead EMU yields higher over the medium term. 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 emerging market debt faces headwinds due to the strengthening USD and we believe spreads can tighten further. The carry is among the highest in the fixed income universe. It is an attractive diversification vs other asset classes.

• In the US, the IHS Markit US Composite PMI came out at 54.9 in April, slightly above a preliminary estimate of 54.8 and in line with March’s final reading of 54.2. The latest expansion in the private sector was driven by an accelerated growth for manufacturing and service sector firms.
• The Federal Reserve left its target range for the federal funds rate steady at 1.5-1.75% during its May 2018 meeting, in line with market expectations. Policymakers said the labour market has continued to strengthen, economic activity has been rising at a moderate rate and both inflation and core inflation have moved closer to 2%, suggesting a June rate hike is on the table.
• Total nonfarm payroll employment came out at 135K in April following a 103K gain in March. 
• In the euro zone, the IHS Markit Eurozone Composite PMI stood at 55.1 in April 2018, little-changed from a preliminary estimate of 55.2 and slightly below the previous month's figure.
• Also, the first estimate of Q1 growth came in at 2.5% annualised, in line with consensus expectations and slightly down from the revised 2.8% in the fourth quarter of 2017.

EUROPE

Slightly positive week for European equities.

• Numerous earnings results and M&A announcements (i.e. Asda/Sainbury's and Sprint/T-Mobile) supported markets last week. 
• Euro zone exporters, particularly Media, Tech, Utilities and Materials firms were among the winners. 
• Media was the best sector, driven by strong results from WPP and Pearson.
• Country wise, Germany’s DAX outperformed, thanks to EON, Infineon and Deutsche Boerse with French’s CAC40 lagged, dragged by its banks

US

Mixed results for US equities.

• A strong finish to the week compensated for a poor star, but results were mixed across the board. 
• The Nasdaq Composite Index performed best, helped in particular by a rise in heavily weighted Apple. 
• Technology stocks also outperformed within the S&P 500 Index, while Health care shares lagged, due to both some poor earnings results and worries that the Trump administration might announce measures to regulate drug prices.
• But the strong economic and earnings environment compensated for the turbulent geopolitical backdrop at the end of the week.

EMERGING MARKETS

Third straight week of losses for Emerging equities.

• A stronger USD and slowly rising US yields saw emerging market borrowing costs hit their highest level in nearly nine months. 
• Latin American markets had a difficult week as the United States cut off metals tariff talks with Brazil, contradicting an earlier statement that the two countries had reached a permanent exemption. 
• Asian markets were relatively stable after North and South Korea’s leaders shared a friendly meeting and vowed to work toward wiping away nuclear weapons from the Korean Peninsula.

RATES

Balanced message from the last Fed meeting.

• The last FOMC yielded a relatively balanced message as rising inflation was recognized but the Fed left rates unchanged and remained committed to a gradual increase in rates. 
• In this context, treasuries moved lower following the rise that had been witnessed in the previous weeks. 
• Core European bonds followed the trend as weak inflation data in the euro zone also pushed yields lower. Peripheral bonds on the other hand witnessed significant volatility and a general rise in a yields.
• 10Y US, UK, Japan and German yields stood at respectively 2.93%, 1.38%, 0.045% and 0.54%.

CREDIT

Credit spreads widened only very slightly last week.

• Credit spreads experienced some relief after a relatively dovish ECB meeting and issuers took advantage of the relatively calm environment to return to primary markets. 
• Retails, AT1s and Sub insurance segments were the underperformers of the week. 
• In terms of primary issuance, the non-financial sector posted roughly EUR 6bn (vs 3.4 last week), whereas Senior financials and Subordinated debt were quite muted.
• Cash bonds saw some widening with Investment Grade rising by 2 bps (to 94 bps) and High Yield moving up by 8 bps (to 307 bps). 
• Synthetic markets were no different as the Itrax Main reached 56 bps (+2 bps) and the Itrax Xover moved to 274 bps (+3 bps)

FOREX

Another grand week for the USD.

• Last week, the USD had another impressive performance and kept its momentum after the US 10Y reached the 3% level. 
• The EUR got another tough week as the latest euro zone inflation and private sector activity printed below market expectations.
• As investors sold risky assets and bought bonds around the globe, the JPY rallied vs. its main peers.

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES