Coffee Break 8/16/2016

Given current macro indicators, US growth is expected to pick up in the second semester, supported mainly by consumption. Exports are the 2nd main contributor to the forecasted acceleration of the growth rate.

Earnings season is over and most publications have positively surprised. It is however worthwhile mentioning that most forecasts were rather low to begin with. If the news flow is better, and if the US mitigates downside risks on a global scale, the Fed has yet to hike interest rates. For that to happen, Janet Yellen has explained that several conditions involving GDP growth, labour and housing markets and the overall stability of global financial markets had to be met. The Fed has limited tools to respond to another economic crisis so the hike cannot be too quick, too steep.

The euro zone seems to be safe from "Brexit"’s consequences for now. Growth is in line with expectations. Continental Europe benefits from a combination of weak but present tailwinds (consumption, more stable confidence by sector, investments and favourable credit conditions).

Periphery countries like Portugal and Spain had fines coming from the European Commission for not meeting their budget objectives but those were waved in light of the structural efforts that the countries mad (especially Spain) and in an effort to not add weight to the anti-European sentiment. A lot of electoral campaigns at different levels are coming up in late 2016 and early 2017.

The UK’s central bank has eased rates by 25bps and improved its monetary stimulus package in light of weaker macro data following the "Brexit" vote. GDP forecast and consumer confidence are on the decline whereas inflation forecasts have been revised upwards. How the British currency evolves will be key in the short and medium terms.

Emerging markets have in our opinion the highest rerating potential. If they have struggled for quite some time, weighed down by declining oil prices, a slower growth in China, fear of an appreciation of the USD, they are now attracting significant investors’ inflow.

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”. The Fed left its rate unchanged at its last FOMC meeting. Following the Brexit and its initial consequences including a fall of the GBP and a weakened outlook for growth in the short and medium term, the BoE is introducing new fiscal and monetary measures, including a 25 basis point cut in Bank rate to 0.25%.

Outside Europe,

• The macroeconomic news flow is in line with sluggish but positive growth.
• 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 are underweight on European and 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 have increased our overweight in emerging markets equities, hence leading to an overall neutral stance on equities.

BOND STRATEGY

• 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, the Census Bureau reported a retail sales’ increase of 2.3% in July 2016. It is below the 3.1% forecasted and below the 4.36% national average between 1993 and 2016.
• The Index of Consumer Expectations, which focuses on how consumers view prospects for their own financial situation, how they view prospects for the economy in general over the near term, and over the long term, came in at 90.4, beating the 89.2 forecast.
• In the euro zone, the annual GDP growth rate expanded to 1.60% for Q2 2016, in line with expectations whereas the economy grew by 0.3% QoQ. Growth was slower in Germany and Spain and flat in Italy and France.

EUROPE

Positive performance for European equities with the Stoxx 600 closing at 346 up by 1.46% for the week.

• European equities erased their post-"Brexit" slump as investors are turning to equities for higher returns.
• Energy producers were some of the biggest gainers late in the week following reports that OPEC cartel would agree to freeze or curtail production.
• From a country perspective, Britain was one of the outperformers as the FTSE250 was up due to a positive performance of Energy and Consumer Discretionary stocks.
• Cyclicals sectors are outperforming defensives and Banks outperformed on the on-going squeeze with two of the worst performing EuroStoxx50 names of the year, Deutsche Bank and UniCredit, the two best performing names on the week.

US

Mixed week for for US equities with the S&P 500 closing at 2184 last Friday.

• Stocks posted mixed performance, but the DJIA, S&P 500 and the Nasdaq Composite Index reached all-time highs during the week before falling back somewhat.
• The S&P MidCap 400 Index underperformed amid typically light late-summer trading.
• Oil prices volatility caused swings in energy stocks and appeared to play a major role in driving overall sentiment.

EMERGING MARKETS

Emerging markets equities hit new one-year highs on Friday and headed for their fifth straight week of gains.

• Below-forecast Chinese data stirred expectations that Beijing would add to its own stimulus.
• The Emerging market equity index was lifted by Hong Kong shares surging to nine-month highs while mainland Chinese markets rallied after retail sales, industrial output and investment data all underwhelmed, leading to bets on monetary policy easing in China.
• Chinese shares rallied the most in a month as property companies advanced on speculation merger deals would accelerate.
• Hungary led gains in eastern European equities as the nation’s economy grew more than forecasted.
• Latin American stocks also advanced as strong US data kept alive optimism over global economic strength.

RATES

G10 Government yields have been, once again, impacted by central banks actions.

• New Zealand rates fell, especially on the belly of the curve, as the RBNZ justified its rate cut by fears concerning future inflation developments.
• The UK rate curve continued to sharply bull-flatten, supported by a limited supply of long-term Gilts available for purchase.
• Euro zone peripheral rates still outperformed core rates.
• The Norwegian rates ticked higher on the back of much higher inflation data (CPI YoY at +4.4% vs. +3.7% expected).

CREDIT

Few market-moving headlines last week, which have not changed the strong technical picture and the risk-tone has continued post BoE announcement.

• Cash has been grinding tighter (- 2bps) while the derivatives market has been a bit more subdued.
• Busy week with for earnings releases; we are now approaching the end of Q2/H1 2016 reporting season.
• On the bank side, Q2 results were generally good and supportive for spreads.
• For non-financial companies however, the picture is less clear with a mixed bag of results.
• The Utilities sector, especially, is suffering from depressed electricity prices in Europe.
• Issuance started to pick up on the bank side with two new AT1 $ deals from UK banks (RBS and Standard Chartered). Strong appetite from the investors with deals oversubscribed up to 10x.

FOREX

Forex performance was dominated by the rebound of oil prices, gaining more than 5% during the week.

• Oil-related currencies delivered the best returns, with NOK further supported by a strong bounce of CPI figures.
• MXN & CAD completed the podium at the top of the table.
• At the opposite side, GBP continued to depreciate as the BoE began its QE program.
• The USD also retreated, depressed by disappointing retail sales and PPI figures.

COMMODITIES

Over the past week, commodities rose, as the GSCI Light Energy increased by 0.8%. Year-to-date performance is positive at 2.4%.

• Both crude oil and Brent prices rose as Saudi Arabia announced it would be prepared to take any possible action to stabilise the global crude oil market.
• Natural gas prices lost close to 5% last week as a weekly inventory report showed stockpiles grew more than expected.
• Arabica coffee lost over 3% last week and reached its lowest price of the last five weeks as the Brazilian currency eased.

WEEKLY MARKET OVERVIEW

UPCOMING FACTS AND FIGURES