This week will bring its share of monetary and fiscal policy-themed news. The Fed is holding its monthly FOMC on 20 and 21 September. The Bank of Japan will meet on the same dates. Ahead of the publications of the conclusions of their meetings, both equity and fixed income markets have weakened.
In addition to the Fed and the BoJ, the Bank of England held its meeting last week and kept its rates at record lows since the last cut early August. The BoE may very well cut them again before year-end. The GBP has fallen on and off vs the USD and the EUR for the past weeks as the markets are trying to decide if the British economy will be hit as badly as expected or not. The uncertainty just weighs on the currency.
Our current investment strategy on traditional funds:
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grey : no change
blue : new change
EQUITIES VERSUS BONDS
We have slightly decreased our exposure to bonds:
- We protected our portfolios against an extension of rates' increase via the use of options.
- We do not expect more dovish messages from central banks over the short term with the stress put on side effects of a continuation of their policy
- The focus is now on government actions and fiscal easing to support growth, which could put more pressure on bonds.
- Inflation should progressively pick up. Economic agents and market expectations are very weak and close to record lows while wage pressure have started and deflation exported by China is reducing and going to disappear in the near term.
- The macroeconomic news flow outside the UK is in line with a sluggish, but positive growth.
- 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 sound consumer expenditures, stable oil prices and a weaker USD should lead to an improving US economy in the second semester.
- 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 overall slightly short duration and have increased this underweight recently.
- 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.
- Our long positioning on Emerging market currencies is based on our conviction that the peak in the USD and the low in commodity prices are behind us.
EUROPE
Negative performance for European equities with the Stoxx 600 closing at 338 down by 2.23% for the week.
- Uncertainties over global monetary policies outlook put some negative pressure on European Equities last week.
- Investors are worrying that central banks are running out of ideas to fight slowing growth.
- Deutsche Bank's shares fell by more than 6% as the German bank has to settle a $14 billion fine by the US government following an investigation over miss selling of mortgage-backed securities.
- At a sector level, Health Care, Travel & Leisure and Construction outperformed the benchmark (1.11%, -0.29% and -0.93% respectively) while Automobiles (-4.33%), Oil & Gas (-5.49%) and Banks (-5.55%) underperformed.
US
Positive week for US equities with the S&P 500 closing at 2139 last Friday.
- High volatility continued to wake US markets up after a long summer of slow trading and few price swings.
- The Nasdaq Composite outperformed other main indexes due to the strong performance of technology stocks.
- Energy underperformed the broad market, as crude oil prices trended lower after statements from the International Energy Agency and OPEC indicated that elevated inventories are likely to keep the price of oil near current levels.
- The Financials sector also lagged as a result of diminished expectations for the Fed to raise rates at its FOMC meeting this week.
- At a sector level, IT, Utilities and Health outperformed the S&P 500 (3.03%, 2.42% and 1.21% respectively) while Materials (-0.99%), Financials (-1.26%) and Energy (-2.91%) were underperforming.
EMERGING MARKETS
Emerging markets showed another weekly drop last week.
- Price swings in emerging market have widened as investors await fresh signals from the Fed as to how soon it will tighten its policy.
- Korea had a difficult week as Samsung Electronics dropped significantly since the announcement of the Galaxy Note 7 recall.
- Taiwan suffered the most within Asian markets due to uncertainties over interest rates outlook plus a decline in the price of crude oil.
- Uncertainties about the rise of Donald Trump in polls leading to the US presidential election weighed on sentiment affected the Mexican market as Trump had pledged to curtail trade and financial flows with its neighbouring country.
- At a sector level, IT, Health Care and Telecoms outperformed the index (-1.60%, -1.97% and -2% respectively) while Real Estate (-3.25%), Industrials (-3.43%) and Materials (-4.39%) were all below the benchmark.
RATES
Global sovereign markets have seen a spike in yields at the start of last week, driven by expectations of a softening of the accommodative policy stance of major central banks.
- Last Thursday the BoE voted unanimously to maintain its bank rate at 0.25% and the stock of purchased assets at £435 billion. The BoE maintained also its guidance for another rate cut in November.
- In Europe, non-core markets (mainly Italy & Portugal) lagged in terms of performance, driven by increased risk aversion, event risk and monetary policy expectations.
- This week, the BoJ will conclude its comprehensive review and will be the key event to monitor next to Wednesday FOMC meeting.
- Global sovereign yields had a mixed performance, with EUR non-core rates lagging.
- 10Y US, UK, Japan and German yields now stand at respectively 1.69%, 0.87%, -0.05% and 0%. Spanish and Italian 10Y yields stand at respectively 1.08% and 1.34%.
CREDIT
Credit ended the week wider due to macro and rate uncertainties combined with idiosyncratic risk from Deutsche Bank.
- US macro data were globally disappointing but CPI numbers topped estimates.
- The US Department of Justice is pursuing Deutsche Bank for $14bn regarding past RMBS sales fuelled weakness across high beta instruments.
- Synthetic indices widened by 10bps for iTraxx sub-financials and 15bps for iTraxx Xover.
- Itraxx Main and cash IG credit widening was more constrained with +3bps WTD.
- Mixed week for new issues with above ?12bn of priced instruments, essentially from non-financial issuers.
FOREX
Last week saw the EUR/USD cross remained range-bounded despite better-than-expected inflation figures in the US.
- The USD and JPY appreciated marginally vs. the EUR. The JPY benefitted from steeper JGB curve, while the USD was supported by slightly higher CPI figures published on Friday.
- Commodity-related currencies suffered as oil continued to grind lower, with CAD underperforming AUD, NZD and NOK.
- EM Currencies, and especially the MXN, suffered from the rise of Donald Trump's lead in US Elections polls.
COMMODITIES
Over the past week, commodities lost slightly, as the GSCI Light Energy was down by 0.9% but nonetheless posted a positive return for the year (+0.3%).
- Oil fell to a one-month low on speculation that the resumption of shipments from Libya and Nigeria could add to the global supply surplus.
- Prices were down 6.4% last week with WTI close to $43 and the Brent below $46.
- Precious metals declined, with platinum heading for a seventh straight week of losses, the longest run since 2013, and palladium set to record the worst slump since May.
- Gold declined to nearly two-week lows after downbeat US data curbed already muted expectations for a US rate rise this week.
- On the other hand, copper prices headed for their biggest weekly gains (+3.2%) in two months as the lagging metal got a boost from signs that demand may strengthen in China, its biggest consumer.
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