Coffee Break 10/17/2016

The recent publications of the minutes of the FOMC meeting held at the end of September, at which the Federal Reserve decided to keep interest rates unchanged, are showing more information over the interest rate hike timing. Several voting members judged a rate hike would be warranted "relatively soon" if the U.S. economy continued to strengthen, although doubts on inflation remained.

The minutes said "it was noted that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labour market and inflation."

In our base scenario, we still believe that the Fed will hike rates in December after the presidential elections and Fed Fund Futures now imply a 63% chance for an end-of-year rate hike.

Our current investment strategy on traditional funds:

Legend
grey : no change
blue : new change

EQUITIES VERSUS BONDS

We currently have a neutral stance in equities vs. bonds:

• The macro news flow is in line with low but positive growth.
  • In the US, we expect accommodative monetary policy to prevail while Chinese authorities will continue to offer a supportive policy mix.
  • Europe is showing resilience following the "Brexit" referendum.
  • The stabilisation in commodity prices mitigates downside risks on a global scale.
• The medium to long-term economic risks have increased due to the various political events:
• For the time being, global growth indicators are little affected by the "Brexit".
• The UK appears to be quite resilient in the immediate aftermath.
• Economic policy uncertainties have come down, but remain historically high with several political risks looming by the end of the year (US presidential elections, Italian constitutional referendum, possible new elections in Spain and "Brexit" negotiations).
  • The two-year "Brexit" negotiations should start by the end of Q1 2017.
  • US presidential elections have been perceived as the n°1 tail risk for investors over the past three months.
• Central banks keep a dovish stance, providing ample liquidity to the markets.
  • In the US, solid PMI's and labour market data for the month of September strengthen the case of a Fed rate hike by the end of the year. Fed Fund Futures now imply a 63% chance for a December rate hike.
  • The Bank of Japan innovated by yield curve targeting, while the ECB is expected to clarify its intentions.
• Oil markets continue their rebalancing, and recent agreement expectations have led the way to higher prices. This is supportive for risky assets, particularly emerging debt, high yield and inflation-linked bonds. We expect a gradual increase in inflationary pressures and are confident in our inflation-linked exposure.
• Emerging markets face fewer headwinds, thanks to a stabilisation of commodity prices, a working Chinese stimulus and a cautious Fed that alleviates fears of USD strength.

REGIONAL EQUITY STRATEGY

• We are currently neutral in euro zone equities (since mid-August).
• The current risk premium of euro zone equities is attractive, but can be largely explained by the level of political risk.
• This underpins our relative caution on European assets while we could still tactically benefit from shorter periods of re-rating (implementation of options strategies).
• We currently have a relative value strategy in favour of the DAX against the FTSE 250, while staying neutral. We anticipate a struggling domestic UK economy following "Brexit".
• We have maintained our underweight in UK equities. The government's perceived hard Brexit stance weighs on UK assets, pushing the GBP to new lows, bond yields significantly higher and leading to a substantial equity markets underperformance in common currency terms.
• We have a neutral stance on US equities and Japan.
• Emerging markets remain our main conviction mainly towards India. Economic fundamentals (expected economic growth at 7.8% with an inflation under control) are improving, both structurally and cyclically and the resilience of the Indian economy is supported by a domestic reform agenda, which makes the country less vulnerable to external influences.

BOND STRATEGY

• We continue to diversify out of low/negative yielding government bonds:
• We remain overall slightly short in duration.
• We are particularly positive on 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 moderately positive on high yield. The significant spread tightening this summer has reduced the potential, but the carry remains attractive.
• We are positive on inflation-linked bonds. We expect an increase in inflation headline numbers at the turn of the year with oil price base effects as main driver.
  • US headline CPI should come in above 2% in December for the first time since mid-2014 and should peak at levels close to 3% during Q1 2017.
  • Euro zone headline CPI should rise towards 1% early next year, a level not seen in the region since end-2013.
• Regarding currencies, our main strategies are:
• Emerging market currencies, based on our conviction that the USK peak and the low in commodity prices are behind us.
• Commodity currencies, via NOK against CHF, to benefit from rising oil prices and an overvalued CHF that upsets the Swiss National Bank. 

• In the US, retail sales rebounded in September (+0.6% MoM and +2.7% YoY) amid a surge in motor vehicle purchases and a rise in discretionary spending.
• Another survey showed, jobless claims continuing to decline towards a 43-year low (246.000), as the labour market is tightening.
• In the euro zone, industrial production rose more than expected in August (+1.6% MoM & +1.8% YoY), fully recovering from the decline in July.
• In Germany, investor sentiment improved more than expected, signalling a relative robust economic activity as the ZEW current conditions index jumped to 59.5 points in October from 55.1 in September.
• In China, producer price inflation rose by 0.1% YoY in September, better than expected by the consensus (-0.3%). Consumer price inflation rose by 1.9% YoY in September following a 1.3% increase in August. 

EUROPE

Nearly flat performance for European equities with the Stoxx 600 closing at 340 up by only 0.09% for the week.

• European stocks were volatile over the week following data that showed an unexpected decline in Chinese exports that created worries about another slowdown in global growth prospects.
• However, stocks bounced back on positive inflation data coming out of China.
• Mining and banking companies trended higher at the end of the week.
• At a sector level, Utilities, Oil & Gas and Retail outperformed the benchmark (2.29%, 1.42% and 1.37% respectively) while Health Care (-0.92%), Basic resources (-1.39%) and IT (-3.49%) underperformed.

US

Negative week for US equities with the S&P 500 closing at 2132 last Friday.

• US stocks ended the week lower as earnings season began with mixed results and a decrease in Chinese exports reignited concerns about slowing global growth.
• Alcoa, traditionally the first large company to report quarterly earnings, fell short of expectations and dragged markets lower.
• Energy stocks were volatile as oil traded above $50 per barrel amid speculation about production cuts.
• Small-cap stocks generally underperformed their larger caps counterparts.
• But financials stocks helped support the market with JPMorgan Chase, Citigroup, and Wells Fargo reporting better-than-expected results.
• At a sector level, Utilities, Real Estate and Telecoms outperformed the S&P 500 (1.34%, 1.20% and 0.66% respectively) while Energy (-1.16%), Materials (-1.19%) and Health Care (-3.27%) underperformed.

EMERGING MARKETS

Negative week for Emerging markets stocks with the index falling by almost 2%.

• China released weaker than forecasted trade data last week and this made uncertainties over an anaemic global demand resurface.
• Thailand's stock market was unsettled last week following the death of the King Bhumibol, who came to power in 1946.
• South African stock market declined following news that Finance Minister Pravin Gordhan had been charged with fraud.
• At a sector level, Energy, Materials and Utilities outperformed the benchmark (-0.28%, -0.49% and -0.60% respectively) while Consumer Discretionary (-2.30%), IT (-3.11%) and Real Estate (-3.26%) underperformed. 

RATES

Global sovereign markets remained under pressure.

• The Fed published its latest minutes, pointing to a high probability of a rate hike in December.
• In the euro zone, the ECB could consider temporary deviation from its QE programme and buying bonds yielding below depo rate.
• The week was marked by rising core sovereign rates, partially driven by the upturn in inflation expectations as more signs appear of inflation bottoming out, supported by oil dynamics.
• 10Y US, UK, Japan and German yields now stand at respectively 1.77%, 1.1 %, -0.06% and 0.06% while amongst non-core countries Spain lagged in terms of performance. 

CREDIT

While the market outperformed at the start of the week, the publication of the FOMC's minutes, and poor Chinese exporting figures negatively affected performances.

• Itraxx Main and Cash remained flat while the cross-over widened until mid-week before finally tightening on Friday, thereby remaining flat over the week.
• On the primary market, the first half of the week was marked by an active pipeline, loaded with significant emissions (3 corporates and 1 financial for a total of $9.4bn), but the trend slowed down significantly after the publication of FOMC minutes.
• The end of the week was more bullish with positive quarterly results for the banking sector (JP Morgan & Citi Group). 

FOREX

The strong momentum in oil prices continued to support the appreciation of commodity-related currencies last week.

• The MXN, BRL, CAD, AUD, NOK and NZD were amongst the week' top performers.
• The GBP massive depreciation stabilised, as the currency performance remained flat vs. the EUR.
• The ZAR was strongly penalised by domestic political uncertainties.
• The SEK was the worst performer, after the release of disappointing CPI figures.

COMMODITIES

Over the past week, commodities went slightly up, as the GSCI Light Energy rose by 0.4%, and posted a positive return for the year (+3.1%).

• Both WTI and Brent prices came down last week with the WTI crude slipping below $52 a barrel on Friday, giving up an earlier gain, as abundant crude supplies outweighed tighter US fuel inventories and OPEC's plan to cut output.
• Wheat futures soared over 4% last week and corn rose by over 3% due to encouraging signs of demand from big importers at a time when US suppliers are known as being the cheapest in the world.
• Copper has recently pushed lower toward the support of $2 as recent Chinese trade data pointed falling demand for industrial metals like copper.

WEEKLY MARKET OVERVIEW



UPCOMING FACTS AND FIGURES