Coffee Break 9/12/2016

In the US, the Presidential elections are rapidly coming up. The Commander-in-Chief Forum (national security and military issues on the agenda took place in New York City on 7 September ahead of presidential debates, which will begin later this month. The first head-to-head debate comes on 26 September. As of 8 September 2016, Hillary Clinton is ahead with 43% of votes but the republican candidate, Donald Trumps, is on her tail with 41% of votes.
Meanwhile, the country keeps giving reassuring macroeconomic news in terms of employment and registered yet another decrease in initial jobless claims (down by 4K to 259K, below market expectations of 265K).

In the euro zone, it came as no surprise that the ECB decided to leave interest rates unchanged at 0% (main refinancing rate), 0.25% (marginal lending facility) and -0.40% (deposit facility). It was confirmed by the policymakers that they expect the key ECB interest rates to remain at present or lower levels for an extended period of time and confirmed that the monthly asset purchases of EUR 80bn are meant to run until the end of March 2017 and beyond if necessary. In the wake of the ECB's decision, bond yields rose and sparked an equity sell-off on Friday.

Emerging markets remain our main conviction, both in equities and bonds. We believe that they have the highest rerating potential. The relative valuation is still very attractive relative to other markets. The economic growth is stabilising and there is less fear of an appreciation of the USD. In addition, Emerging markets have the highest medium term expected return thanks to a higher expected growth.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : new change

EQUITIES VERSUS BONDS

We currently have a neutral strategic positioning in equities vs. bonds:

• The "Brexit" has increased the downside risk, but there is no spill over for now, as the growth deterioration remains contained to the UK and early indicators show global growth is little impacted.
• The macroeconomic news flow outside the UK is in line with a sluggish, but positive growth:
  • Continental Europe appears to be resilient.
  • Improving macroeconomic indicators in the US and China mitigate the downside risks on a global scale.
  • We remain nevertheless vigilant, as the depth, duration and diffusion of the "Brexit" confidence shock remains highly uncertain.
• Central banks follow the financial crisis template.
  • Led by the Bank of England, they provide ample liquidity and remain highly accommodative.
  • The Fed left its rate unchanged at its last FOMC meeting. At Jackson Hole, Janet Yellen said “that the rate hike case has strengthened in recent months”, while at the same time the FOMC continue to point to their gradual rate hike approach.
  • The European Central Bank has decided to leave its rates unchanged and to keep up its assets-purchasing program to the tune of EUR 80bn on a monthly basis.
• Oil market continue its rebalancing, leading to a stabilisation of the commodity markets. This is supportive for risky assets, particularly emerging debt, high yield and inflation-linked bonds.
• Emerging markets face fewer headwinds, thanks to a stabilisation of commodity prices, a working Chinese stimulus and a cautious Fed.
• Although investor sentiment has improved recently, we remain vigilant, due to a busy political agenda (Russian parliamentary elections, regional elections in Germany, constitutional referendum in Italy and the US presidential elections).

REGIONAL EQUITY STRATEGY

• We currently have a neutral weight in euro zone equities (since Wednesday 10 August). The European equity markets are close to key resistance levels. We are positioned to benefit from a potential extension of the recovery and have therefore neutralised our euro zone underweight.
• We have maintained our underweight in UK equities.
• 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 neutral stance on Japan.
• We are overweighed in emerging markets. Fundamentals are improving and valuation is attractive. A positive turn in flows and an attractive technical set-up shows a high re-rating potential. Technical indicators are now bullish and we continue to monitor the important technical levels closely.

BOND STRATEGY

• We continue to diversify out of low/negative yielding government bonds:
  • We remain positive on US corporate bonds, high yield bonds and emerging debt, both in local and hard currency. Emerging bonds are benefiting from inflows, as they provide an attractive yield compared to developed markets.

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 further re-rating of inflation-protected bonds over the course of the coming quarters.

• In the US, the ISM non-manufacturing PMI showed a significant decrease from 55.5 to 51.4, well below market expectations of 55. It is the lowest reading since February of 2010 as activity, new orders and employment all slowed down.
• US Initial jobless claims fell to 259K, below market expectations of 265K, reaching the lowest level since mid-July.
• In the euro zone, the Markit composite PMI decreased to 52.9 in August from 53.3 the previous month.
• The GDP QoQ growth came in at 0.3%, matching market's expectations, and staying stable compared to last quarter.
• In Germany, the industrial production MoM decreased in July, from 1,1% to -1,5% whereas the rate was expected to be 0.4%. Being the largest euro zone economy, this weaker production could impact non only the German economy but also the euro zone. 

EUROPE

Negative performance for European equities with the Stoxx 600 closing at 345 down by 1.40% for the week.

• European markets fell last week as no new stimulus emerged from the last ECB meeting as interest rates and monetary stimulus program remained unchanged.
• The 10% YoY plunge in Germany's exports in June also shook markets. It is the sharpest decline since 2009, as the industrial sector struggles with lower sales in China, the US, and the UK.
• At a country level, Switzerland was the least affected market dropping only around 0.5% over the week. Most other main markets (UK, Germany, France, Italy and Spain) lost around 1% over the week.
• At a sector level, Insurance, Automobiles and Basic resources, outperformed the benchmark (0.57%, 0.02% and -0.02% respectively) while Food & Beverages (-2.33%), Real Estate (-3.32%) and HPC
  (-3.62%) underperformed.

US

Negative week for US equities with the S&P 500 closing at 2127 last Friday.

• US stocks suffered their largest weekly decline since the start of the year after a sharp sell-off at the end of the week.
• Friday’s volatility halted a very long period of light trading activity and relatively stables stock prices.
• On a shortened trading week du the Monday's Labor Day holiday, investors seemed disappointed by the non-action by the ECB in Europe.
• Markets were also taken aback by the North Korean nuclear test and by comments from some Fed members that “a reasonable case” could be made for higher rates.
• At a sector level, Energy, Utilities and Health Care outperformed the S&P 500 (1.50%, -1.23% and -1.57% respectively) while Materials (-2.79%), Consumer Discretionary (-2.92%) and Consumer Staples (-3.24%) were underperforming.

EMERGING MARKETS

Positive performance for Emerging markets equities last week.

• Emerging market stocks trimmed their biggest weekly gain in a month after the ECB refrained from pledging more stimulus and North Korea conducted its biggest-ever nuclear test.
• By downplaying the likelihood for additional stimulus, the ECB’s decision raised questions about how much further the emerging market rally can run as stocks trade near 14-month highs.
• Poland was high on investors’ agenda as Warsaw waited on a crucial credit rating review from Moody’s.
• South Korea’s shares tumbled and the KRW, which is the best-performing emerging Asia currency this year, fell despite the country’s central bank keeping interest rate steady. The main reason fro the fall was the nuclear test in North Korea.
• China also trimmed its rally which was supported by Chinese trade data showing imports rising for the first time in two years, suggesting a pickup in domestic demand as exports data stayed weak.
• At a sector level, IT, Financials and Utilities outperformed the index (+2.09%, +1.34% and +1.28% respectively) while Health Care (0.37%), Materials (-0.54%) and Consumer Staples (-0.58%) were all below the benchmark. 

Global sovereign markets came under pressure, disappointed by the ECB outcome.

• The ECB did not announce a QE extension neither a change in the technical parameters of its purchase program, leaving all options on the table.
• The resilience of macro data after the "Brexit" outcome, gives more time to the ECB to assess the best policy options going forward. Mario Draghi indicated that committees have been "tasked" to look at ways to redesign the QE program.
• Italy lagged in terms of performance, as uncertainties surrounding the referendum on constitutional reform and speculation on a 50- year bond issue continue to weight in.
• In the US, the August non-manufacturing index surprised negatively, expanding at the weakest pace in six years.
• Global sovereign yields ended the week higher. 10Y US, UK, Japan and German yields now stand at respectively 1.67%, 0.86%, -0.02% and 0%. Non-core yields also were under pressure, leaving Spanish and Italian 10Y yields at respectively 1.07% and 1.24%. 

CREDIT

Risk-on mood dominated Credit markets before suffering from a halt towards the end of the week amid ECB policy reassessment.

• Mario Draghi's announcement that some form of QE extension was not discussed at the ECB meeting dampened market expectations.
• Cash and synthetic credit spreads edged wider on Friday, reversing the tightening from earlier in the week.
• Spreads ended flattish for IG credit, both cash and derivatives indices, while HY credit widened with +2bps for cash and +4bps for itraxx X-over.
• EUR Corporate primary markets have seen the busiest week in 4 months with above EUR 19bn of issuances. 

FOREX

The USD headed lower over the week against the EUR as investors reassessed the divergence in policy paths after the ECB meeting and the disappointing US economic data.

• The USD weakened versus most its developed markets peers as investors reassessed the Fed outlook following disappointing data.
• Emerging currencies (ZAR, BRL, MXN,..) also came under pressure after the ECB outcome. 

COMMODITIES

Over the past week, commodities rebounded slightly, as the GSCI Light Energy rose by 1.3% and posted a positive return for the year (+1.2%).

• Both crude oil and Brent prices jumped last week, as tropical storms and hurricane Hermine combined to slow the movement of oil tankers and shut down offshore drilling. This forced the US oil industry to dip into its massive oversupply at the highest rate for this time of year.
• Natural gas prices continued to rise on smaller than expected inventory build (36 billion cubic feet last week compared with the 43 billion cubic feet forecasted). 

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES