Coffee Break 2/12/2018

Markets worldwide have struggled last week in a technical - but not fundamental - flash crash.
The increasing investors’ fear of an end to the so-called goldilocks environment is not justified and we expect the supportive fundamental backdrop to prevail. More can be read on the topic, in our note published on www.candriam.com.

On a more political note, in the US, lawmakers passed a budget deal that will hopefully put an end to the spending fights that have been happening throughout President’ Trump’s first year in the oval office. Congressional elections are coming up in November and rising deficits will certainly be a topic for financial markets.

In Germany, Angela Merkel has finally reached a coalition agreement with the center-left Social Democratic Party (SPD), ending a four-month period of political uncertainty. For the German Chancellor, the draft coalition deal comes at a price with the crucial posts of finance, foreign affairs and labour going to the SPD. The agreement will have to be voted by SPD party members though, and results are expected on 4 March.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

While we have reduced our exposure to equities, we remain positive on the euro zone and Japan. We actively manage our options strategies and will remain opportunistic while looking for an entry point.

• Global economic momentum is accelerating further, however geopolitical risks remain.
  • We concentrate our portfolio’s regional positioning on the euro zone and Japan. Emerging markets are benefitting from supportive fundamentals and a weaker USD.
• Central banks are turning less accommodative:
  • The Federal Reserve started its balance sheet reduction in October, hiked in December and should hike three times in 2018.
  • The ECB has recalibrated its programme, buying less bonds as of January. A rate hike should not occur before 2019.
• Equities have an attractive relative valuation compared to credit. US equities now trade at 17x 2018 earnings, while their forward price-earnings was still above 20x one week ago. In addition, strong earnings growth should remain supportive for equity markets’ performance.

REGIONAL EQUITY STRATEGY

• We remain positive on euro zone equities which are supported by a strong economic and earnings momentum and relatively attractive valuations. Some political hurdles are nevertheless present.
• We have kept a neutral –tactical- stance on emerging markets equities.
• We have become less negative on UK equities.
• We remain neutral on US equities.
• We are positive on Japanese equities as earnings have been progressing so far without a depreciation of the JPY.

BOND STRATEGY

• We are negative on bonds and have an even lower duration now. As the momentum in rising bond yields accelerated, we further reduced our duration in the US and Germany by around 0.25.
• With a tightening Fed and expected upcoming inflation pressures, we assume rates and bond yields should continue their uptrend.
• 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. The correction on US High Yield market observed recently is not expected to continue. 

• In the US, the January ISM non-manufacturing PMI was published at 59.9 beating forecast of 56.4.
• This level beat market forecasts of 56.5 and pointed to the strongest expansion in the services sector since August 2005.
• In the euro zone, the composite PMI was revised up by 0.2 pt in the final report for a total increase of 0.7pt in January.
• By country, Germany and France saw their composite output index broadly unchanged, but there were big jumps in Italy (+2.5 pts) and Spain (+1.4 pts). 

EUROPE

Worst week in two years for European equities.

• Markets endured a very volatile week with all sectors trading in the red except for Travel & Leisure shares, which, outperformed as heavyweight Compass supported the entire sector following strong results.
• Telecom companies were among the worst performers with Vodafone trading lower despite its deal with Liberty Media, which, should be seen as a potential positive driver for the sector.
• Country wise, the FTSE MIB outperformed (again) supported by its banks and strong results from Unicredit and the FTSE 100 also traded above its peers helped by the falling GBP.

US

US stocks suffered their worst weekly decline in two years.

• The main benchmarks entered correction territory, off over 10% from their recent highs.
• Much of the attention was focused on the Dow Jones Industrial Average, which suffered two declines on Monday and Thursday exceeding 1,000 points, its largest in history.
• The market’s sharp decline was in clear contrast with the favourable corporate earnings reports published for Q4 2017.

EMERGING MARKETS

The global equity market correction also affected the Emerging markets.

• The rising unease over a possible uptrend of (wage-driven) inflation in the US, which, was the main driver behind the market turn-around, also hit emerging markets, although to a slightly lesser extent.
• While overall, emerging markets slightly outperformed developed markets, no EM market could avoid losses on the week.
• Despite being one of the strongest markets in 2017, and not being the driver behind this recent global correction, China was the main victim in the EM equity sell-off. 

RATES

Rising rates environment last week.

• With equities remaining under pressure following the markets’ collapse, some volatility across bond markets occurred throughout the week.
• But strong and stable macroeconomic and inflation numbers continued to support a general uptrend in rates.
• 10Y US, UK, Japan and German yields stood at respectively 2.61%, 1.41%, 0.078% and 0.63%. 

CREDIT

Volatile week for credit markets.

• The equity markets collapse led to heightened levels of volatility in credit markets, and credit derivatives saw sharp movements with the ITraxx main up by 6 bps, while the Xover moved up by 15 bps.
• The cash bond markets appeared to be more resistant (mainly as a result of lower primary issues), though spreads did widened, especially on high beta names (subordinated debt).
• The EU corporate debt investment grade spreads widened by 2 bps and ended at 76 bps.
• Issuance remained very low last week.

FOREX

Positive week for safe haven currencies.

• The sell-off in equity markets has pushed safe haven currencies such as JPY, USD and CHF higher last week.
• The Scandinavian currencies (i.e. NOK & SEK) were both the major underperformers in the major currencies universe. These currencies usually perform poorly in a risk-off environment.
• Furthermore, weaker-than-expected inflation and growth data in Norway, combined with lower oil prices, push the NOK lower.
• Weakness in the high beta currencies (EM and commodity-related currencies) pushed the USD up. 

WEEKLY MARKET OVERVIEW

 

UPCOMING FACTS AND FIGURES