Coffee Break 1/22/2018

Global equity markets have continued to move up last week despite rising concerns of a US government shutdown. Concerns were justified, as the US government entered a partial shutdown on Saturday, after Senators failed to agree on a short-term funding measure. These uncertainties weigh on the USD and push local bond yields higher (above 2.60% last week), marking a fresh ten month high. The Q4 earnings publication season has started and results are on track. Forward earnings estimates for 2018 continue to be revised higher. In this context, our portfolios remain broadly unchanged in a risk-on mode, keeping a low bond duration.

The political developments in Europe are – at least – as exciting as those in the US. There is a distinct possibility that euro zone policy rifts could be overcome this year. By the end of Q1 2018, Italians will have cast their votes in a general election and Germany might have a new government in place, especially after German socialists (SPD) backed the start of formal talks with Chancellor Merkel’s conservative bloc for a repeat of the so-called “grand-coalition”. To some extent, a grand coalition in Germany would be good news for the euro zone and all its member countries but several hurdles certainly remain. A more supportive Germany would end some political uncertainties that have paralysed the European reform agenda and should open new horizons. Given the support of the economic cycle and an accommodative central bank, the current window of opportunity to strengthen the Euro area is favourable. The EU Council on 22-23 March could well mark the starting point of a more ambitious agenda.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : change

EQUITIES VERSUS BONDS

We remain positive on equities via both the euro zone and Japan.

• 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 this year.
  • The ECB has recalibrated its programme, buying less bonds as of this month. A rate hike should not occur before 2019.
• While fundamentals remain investors’ focus for the time being, the recent US government shutdown and upcoming debt ceiling discussions might create some uncertainty.
• Equities have an attractive relative valuation compared to credit.

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.
  • In Germany, Angela Merkel is still negotiating a new coalition. Things are nevertheless heading into the right direction with the recent approval of the SPD members to start formal talks with the CDU/CSU.
  • In Italy, the economic recovery has been self-sustained, leading to continuous upward revisions. General elections are coming up on 4 March but the uncertainty is not weighing on the market.
• 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. Donald Trump has recently signed the tax bill passed by Congress, but the FY 2018 spending legislation is still pending.
• We are positive on Japanese equities. Japanese earnings have been progressing so far without a depreciation of the JPY.

BOND STRATEGY

• We are negative on bonds and have a low duration.
• 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 to 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 University of Michigan’s consumer sentiment came in at 94.4 in January and down from 95.9 the month before. It is the lowest reading since July 2017, as consumers evaluated current economic conditions less favourably.
• The number of Americans filing for unemployment benefits decreased to 220K whereas expectations were at 250K.
• In the euro zone, inflation rate YoY came in at 1.4% last December, in line with forecasts and down from 1.5% the previous month.
• In the UK, retail trade rose by 1.4% YoY last December, missing market expectations of 3%. 

EUROPE

European equities ended the week on an upward note.

• Cyclicals significantly outperformed defensives once again as US treasuries took a new leg higher.
• Technology stocks performed best, led by ASML on strong earnings.
• Oil & Gas companies lagged following the fall in oil prices.
• Country wise, the FTSE 100 lagged European indices as the GBP made post-“Brexit” highs and weighed on UK exporters. The FTSE MIB and the DAX outperformed supported by the Banks for the Italian index and by BASF’s earnings and Infineon’s upgrades for the German one.

US

Modest gains for US equities.

• Q4 earnings reports drove much of the market’s movements during a holiday-shortened week.
• Consumer staples stocks led gains while energy, industrials, business services and real estate lagged.
• Data and analytics firm FactSet has drastically reduce its estimate of overall earnings growth for the S&P 500 Index, to a decline of 0.2% versus an advance of 10% estimated the week before.

EMERGING MARKETS

Sixth straight week of gains for Emerging markets equities.

• Chinese growth data lifted Asian markets to a record peak and the CNY to a 2Y high.
• Taiwan also performed well, led by Taiwan Semiconductor Manufacturing, which published a higher-than-expected sales forecast for 2018.
• Chile’s equities market hit a record high, boosted by conglomerate Copec and a better outlook for copper prices and Argentina’s stock index also rose amid heavy interest from international investors. 

RATES

Quiet week on the bond markets.

• There was some reassessment of the hawkish comments delivered in the previous week, and combined with lower supply led to small declines in the German 10Y.
• Spanish and Italian bonds also saw good performance.
• In the US, the T-note continued to climb and reached 2.6% as better economic data continued to trickle through.
• 10Y US, UK, Japan and German yields stood at respectively 2.63%, 1.33%, 0.085% and 0.56%.

CREDIT

Strong week for credit markets on the back of fewer issuance than anticipated.

• The first AT1 issuance of the year was met with strong interest (8x oversubscribed).
• US banks started to report their annual earnings with mixed results.
• Cash credit spreads tightened by 3bp for Investment Grade and 5bp for High Yield.
• Regarding derivatives, iTraxx Main remained flat at 44.3 and iTraxx Xover widdend by 6.8 bp.

FOREX

The EUR strengthened considerably over the week, continuing its recent rally.

• The USD lost some grounds due mainly to the US government shutdown.
• Growth strengthening elsewhere in the world (positive for Emerging currencies) and central bank divergence narrowing (positive for the EUR, JPY, and GBP) affected the USD last week.
• With expectations that the BoJ could be heading towards normalisation, the JPY went down last week.
• The GBP was on the rise last week despite a weaker than expected core CPI release and disappointing retail sales.

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES