Coffee Break 9/5/2016

After Jackson Hole, the probability of an interest rate hike in the coming months has increased. Some governors of the Fed like Jerome Powell stated that the Fed couldn't afford to be patient, but should increase interest rates gradually, while Stan Fischer said on CBNC that Janet Yellen’s comments were consistent with the possibility of two rate hikes a year. However, some members prefer to wait for a real inflation rebound and a business sentiment recovery. In our base scenario, the Fed will not hike rates before the US presidential elections and probably in December at the earliest.

Emerging markets were not really impacted and thus remain our main conviction, both in equities and bonds. We believe the Fed’s monetary policy will remain accommodative, limiting the USD appreciation, while emerging markets’ fundamentals will continue to improve thanks to a stabilisation of commodity prices and the Chinese stimulus. Finally, this asset class continues to benefit from inflows, as it provides a decent yield compared to developed countries.

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.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.
  • 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.
• 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, According to the Commerce Department, consumer spending increased for the fourth consecutive month in July (+0.3%), thanks to strong automobile demand. Consumer spending accounts for more than two-thirds of the economic activity.
• Job growth also rose less than expected with nonfarm payrolls up by 151.000, while wage growth slowed down to a 0.1% growth pace in August. The unemployment rate remained at 4.9%.
• In the euro zone, economic sentiment fell to 103.5 in August, its lowest level since March and well below a Reuters forecast of 104.1. Confidence fell in all of the five largest economies, with the exception of France.
• In China, the manufacturing sector unexpectedly expanded in August with a rise to 50.4 of the official PMI. 

EUROPE

Positive performance for European equities with the Stoxx 600 closing at 350 up by 1.96% for the week.

• European markets were boosted last week by supportive performances from financials, mining, and utilities stocks and a strengthening consumer sentiment.
• The moderate US jobs growth also helped European stocks at the end of the week.
• On the negative side, lackluster earnings, post-"Brexit" uncertainties and persistent political risk precipitated another series of outflows in European equities.
• As domestic demand for manufactured goods in Germany is slowing, according to government data, concerns that Europe's largest economy may be set for an economic slowdown are increasing.

US

Positive week for US equities with the S&P 500 closing at 2180 last Friday.

• Market activity was exceptionally light and uneventful early last week, although volumes picked up a bit on Wednesday as investors closed their books for the month.
• The rise of consumer spending boosted stocks last week even after some disappointing retail earnings on Tuesday.
• Markets jolted on Thursday by comments from some Ford executives stating that automobiles sales had hit a "plateau," alongside news of a disappointing reading on factory activity and a decline in oil prices.
• On Friday, investors seemed to welcome news that companies had added 151,000 jobs in August, modestly below consensus expectations.

EMERGING MARKETS

Emerging markets stocks ended Friday just below last week's close.

• The emerging market rally has run out of steam in the past couple of weeks following hints that a US interest rate increase could happen before the end of the year.
• But emerging markets inflows remain in a range bound in the past two months.
• South African assets have been pressured by an investigation into whether Finance Minister Pravin Gordhan, which is popular with businesses and investors, spied on politicians.
• In Turkey, the market purchasing manager' index shrank for the sixth consecutive time in August.
• Most of Latin American markets showed some weakness as conflicting comments from major oil suppliers have added to oil's volatility.
• India recorded its biggest weekly gain in 2 months, as strong August sales data of companies such as Hero motor lifted investor sentiment. 

RATES

After a very calm week, sovereign rates experienced some volatility on the back of resumed supply and US payrolls.

• Euro zone government gross supply resumed markedly as Germany, France, Italy, Spain and Portugal returned to market for around EUR 27bn.
• Despite the heavy supply, rates in core markets managed to end the week slightly above the previous week levels (+3bps) while the 10s30s slope bear steepened in Germany and France (+5bps).
• Peripherals deteriorated with Spanish bonds underperforming Italian peers so that the spread tightened by +7bps (from -21 to -14). This was due to the resurgence of the political risk premium attached to Spanish bonds as Mariano Rajoy failed to gain backing to form a Government.
• Similarly, UK rates sold off strongly driven by the surprisingly and very strong manufacturing PMI (53.3 from 48.2).
• US rates dropped at the opening on Monday. However, the mood changed rapidly after the release of decent US payrolls (yields moved back to 1.61%).
• All in all, sovereign yields ended the week close to last week levels. 10Y US, UK and German yields now stand at respectively 1.61%, 0.73% and -0.04%. 

CREDIT

After a quiet summer, the European credit market woke up with a very busy week in terms of supply.

• More than EUR 11bn of issuance in the first two days of the week were issued. These deals were generally well absorbed despite the heavy volume.
• The secondary market saw some two-way flows (CSPP eligible bonds were better offered as customers were making some room for upcoming new issues) but spreads remained largely unchanged.
• Cash ended the week -1bps vs the previous week to 107Bps (Govt OAS) and Itraxx indices remained globally unchanged. 

FOREX

The GBP climbed steeply last week, led by impressive manufacturing surveys.

• The GBP/EUR hit a four-week high at 1.19 as the "Brexit" shock may impact less than initially feared.
• The USD/EUR experienced some volatility during the week (1.113-1.120) after decent Non farm payrolls figures and disappointing ISM manufacturing data (49.4 vs. 52 expected).
• The EUR/JPY rose steadily throughout the week and ended at 116.26. 

Over the past week, commodities were slightly negative as the GSCI Light Energy was down by 2.5%.

• Both crude oil and Brent prices fell last week, heading to their sharpest weekly loss since January, as investors brushed aside talk that OPEC might freeze production and focused on a growing glut from US stockpiles.
• Coffee futures staged a strong start to September, as data showing a slump in world exports crystallised concerns of tighter supplies.
• Natural gas prices increased by about 3% last week, due to a sharp inventory rise as the US Energy Information Administration reported that domestic natural gas stocks increased by 51 billion cubic feet. Analysts were expecting a storage addition of around 35 billion cubic feet. 

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES