Coffee Break 8/1/2016

The earnings season is on-going with heterogeneous results.
In Europe, earnings publications are showing more positive surprises than last quarter, both on the sales and the EPS sides, except for the oil and gas sector. On the sales side, the technology and financials’ sectors are standing out with more than 60% and more than 80% positive surprises. As stated last week, this is in part due to an improvement of the very grim outlook analysts had at the beginning of the year. On the EPS side, consumer goods, a defensive sector, is standing out with more than 80% positive surprises. If results are better than last quarter, they are still disappointing with generally weak results and negative EPS growth YoY for a majority of sectors.

In the US, earnings momentum is clearly improving. Only energy, financials and IT are posting negative YoY EPS growth but without a doubt, in terms of earnings surprises, this is the best quarter since 2009. The US market has been resilient in the past months. Since the June FOMC meeting, the Bloomberg US Financial Conditions Index, an index which tracks the overall level of financial stress in the US money, bond and equity markets to help assess the availability and cost of credit, has eased by 30bps. The Fed will keep its dovish attitude despite improving labour market and retail sales in the expectations of further strengthening economic data. The probability of a Fed rate hike implied by interest rate futures is now back to pre-"Brexit" vote levels: at 26.4% for a September hike and at 46.6% for a December hike. The Fed is not the only central bank keeping up its easing conditions. The Bank of England, the European Central Bank and the Bank of Japan are on the same bandwagon.

In Japan, a country also plagued by low growth, low inflation, and an aging population, the Prime Minister Shinzo Abe and the BoJ are working hand in hand to reboot the economy. Mid July, the current ruling coalition won a landslide victory in the upper house election. Shinzo Abe vowed a consequent fiscal stimulus package to be announced on 2 August and is eager to find a harmonious coordination with the BoJ’s monetary policy. The BoJ announced last Friday that it would expand its ETF purchasing program and leave its key interest rate on bank reserves unchanged at -0.1%. This is lower than the market’s expectations. “Helicopter money” seems to be off the table for now.

Our current investment strategy:

Legend
grey : no change
blue : new change

EQUITIES VERSUS BONDS

Visibility has been reduced by the outcome of the EU referendum in the UK. A nimble approach in our investment scenario will be warranted in the coming months as "Brexit" raises more questions than gives answers. We are reassured by the hands-on approach by central banks. The ECB is according to Mario Draghi “ready, willing and able to act”. Meanwhile, the Fed left its rates unchanged at its last FOMC meeting on 27 July. Two day later, the BoJ announced that it would pursue its monetary stimulus while the Prime Minister will announce the government’s fiscal stimulus package this week.

Outside Europe,

• The macroeconomic news flow is in line with sluggish but positive growth.
• Stabilising macro indicators and commodity prices still above USD 40 have led to easing financial conditions compared to the start of the year.
• The PBoC is set to continue its easing policy at a later stage.
• Emerging markets remain historically cheap and have been resilient in the Brexit aftermath. A combination of improving fundamentals and a still dovish Fed has further improved the region’s attractiveness.
• Emerging markets are seeing investor inflows as "Brexit" has less impact on distant regions. In light of the latest economic news, we have increased our emerging markets exposure.

REGIONAL EQUITY STRATEGY

We have an underweight on equities mainly on European and UK ones.

• We have a neutral stance on US equities, as the US market is less impacted and thus more resilient in the current market environment.
• We have a slight overweight on emerging markets equities: the short-term evolution will depend on the evolution of the USD, a more dovish Fed and the global context. The solid momentum into H2 in China reassures us.
• We have a neutral view on Japan but implemented tactical derivative strategies to benefit from any upcoming announcement of fiscal and monetary policies.

BOND STRATEGY

We have increased our exposure to emerging markets debt by adding to local and hard currency debt.

• In the light of "Brexit" uncertainties, we had recently increased our duration, as investors are looking for safe havens and policymakers keep an accommodative stance.
• We continue to diversify out of low/negative yielding government bonds:
  • We are positive on credit. In the current context, we see more potential in credit than in equities.
  • We are positive on inflation-linked bonds. We view the subdued inflation expectations as a temporary phenomenon and expect wages and consumer price inflation data to rise gradually. This implies a re-rating of inflation-protected bonds over the course of the coming quarters.
  • Our constructive view on commodity prices is reflected in our exposure on emerging markets debt, both in local and in hard currency terms. 

• In the US, Markit Flash US Composite PMI came in at 51.5 in July slightly up from the June reading. Manufacturing activity growth accelerated to the highest since October 2015 while the services sector rose at a slower pace.
• Last Wednesday, the Fed announced its decision to keep the federal funds rate unchanged for the 5th time. Labour market strengthened but the overall economic data still needs to improve.
• The Bureau of Economic Analysis released an advance estimate of the GDP Growth rate QoQ. It came in at 1.2% vs. a forecast of 2%.
• In the euro zone, preliminary estimates showed a GDP Growth rate QoQ at 0.3% in line with the forecast but lower than the rate of expansion of 0.6% for Q1 2016. The French economy stalled and weighted on this rate, which is the lowest in the past 9 months. 

Both crude oil and brent declined to their lowest level since last April, losing over 5% in one week.

• Slowing economic growth threatened to worsen on-going oversupply of crude and refined products.
• Natural gas futures rallied by over 5% last week, as the US government released smaller than expected data on the domestic inventory weekly climb. Prices were lifted to their highest level in nearly a month.
• Wheat prices continued their decline and lost close to 5% last week as we are close to the end of the harvest season, which was particularly good with an excess of grain supply, which is bringing prices down. 

EUROPE

Another flattish performance for European equities with the Stoxx 600 closing at 342 up by only 0.46% for the week.

• Mixed corporate earnings overall supported a slim rise of European equities.
• Energy stocks were under pressure given the falling oil price.
• Germany’s DAX 30 became the latest index to recoup all of its losses since the "Brexit" vote.
• Bank stocks rose in the week's final trading hours in anticipation of the 2016 stress tests results.
• At a sector level, Automobiles, Basic resources and Construction & Materials outperformed the benchmark (3.15%, 3.07% and 2.71% respectively) while Utilities (-0.38%), Telecoms (-0.88%) and Oil & Gas
  (-3.70%) underperformed.

US

Flat performance for US equities with the S&P 500 closing at 2174 last Friday.

• Major benchmarks were generally flat last week while the technology-heavy Nasdaq Composite Index and the smaller-cap benchmarks recorded a fifth consecutive week of gains.
• The Nasdaq was boosted by strong performance by Alphabet (Google) and Amazon.
• The fall of oil prices to a three-month low took a toll on energy stocks and weighed on sentiment generally.
• At a sector level, IT, Health Care and Materials outperformed the S&P 500 (1.55%, 0.33% and 0.12% respectively) while Utilities (-1.19%), Consumer Staples (-1.46%) and Energy (-2.07%) were underperforming.

EMERGING MARKETS

Barely positive performance for Emerging markets equities, up by 0.48% for the week.

• Emerging stocks were set for a second month of gains on Friday though they slipped off 11-month highs after the BOJ's new easing measures disappointed markets.
• Turkey recovered some of last week's post-coup losses with the TRL gaining around 1.7%. The markets digested poor data on Turkey's trade deficit.
• The RUB, the MXN and the MYR fell on the back of three-month low oil prices. Equities in Russia also fell by 0.2%
• The Egyptian stock markets were shut on Friday, but ended Thursday with weekly and monthly gains after news of loan talks with the International Monetary Fund and expectations of a currency devaluation.
• At a sector level, Materials, IT and Consumer Discretionary outperformed the index (2.29%, 1.17% and 1.09% respectively) while, Telecoms (-0.36%), Consumer Staples (-0.84%) and Energy (1.79%) were all below the benchmark. 

RATES

Core sovereign markets posted strong performances last week.

• The BoJ disappointed on Friday, delivering less stimulus than the market expected. The BoJ is expanding its purchase of ETFs to 6 trillion per year, but refrained to increase bond purchases or change interest rates.
• Q2 growth data (0.3% QoQ) in the euro zone point to a further moderation in growth.
• Core sovereign markets delivered strong performances with the exception of Japan, while non-core countries spreads remained fairly stable.
• 10Y US, UK, Japan and German yields now stand at respectively 1.48%, 0.69%, -0.2% and -0.10%. Spanish and Italian 10 year yields also turned lower, reaching 1.01% and 1.16% respectively. 

CREDIT

No real direction for credit spreads last week (stable around 115bp).

• Investors are cautious, pending the banking stress tests results.
• Uncertainties around the Monte Paschi resolution put some pressure on Italian banks.
• The earning season is showing relatively good results, with cost-cutting still the main story.
• Oil price is down and weaker than expected results for majors like BP and Shell impacted negatively the sector.
• The primary issue market remained muted last week. 

FOREX

The limited intervention by the BoJ, drove the JPY higher over the week.

• The JPY surged as the BoJ refrained from expanding its government bond purchase program.
• The USD lost some ground against the EUR following this week FOMC meeting. Despite diminished risk to the economy, The Fed continues to monitor closely inflation indicators and global economic and financial developments.
• Among emerging currencies, the RUB extended losses driven by continued oil weakness. 

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES