Weekly Insights 4/16/2018


  • US: Core inflation slightly higher YoY but in line with consensus.
  • Euro zone: Increasing industrial production.
  • Asset Allocation: We have become neutral on Emerging markets.

Asset Allocation :

Overall, our mid-term base scenario remains supportive for equities against bonds. Growth should remain robust, though momentum is somewhat fading outside the US beyond the second half of the year.

Inflation is gradually increasing, but does not represent a major concern to us, while monetary tightening remains progressive. Higher volatility might create opportunities, especially as equity market valuations have become less stretched after the recent corrections.

Nevertheless, we are currently neutral on equities as we see an increase in downside risks to our base scenario, such as the peaking macro momentum, accelerating monetary tightening in the US and intensifying concerns on protectionism. Clearly, we are looking for a better entry point and gain more conviction to add risk to our portfolios.

Our current investment strategy on traditional funds:

grey : no change
blue : change


On the short term, we see a less favourable risk-reward momentum. We maintain our neutral stance on equities and we decrease our Japanese equity exposure to neutral.

  • Global growth momentum outside the US is likely to have peaked.
  • Global monetary tightening is progressive, but the US are tightening first; given the accommodative fiscal policy.
    • The Federal Reserve started its balance sheet reduction in October 2017, hiked in December 2017 and in March 2018.
    • The ECB has recalibrated its programme, buying less bonds as of January. A rate hike should not occur before 2019.
  • The escalation of tensions on global trade represent a new development and a major uncertainty.


  • We maintain our neutral stance on euro zone equities. The region still displays a robust economic expansion but activity indicators show some signs of weariness. The ECB remains accommodative, and is not in a hurry to become hawkish. Corporate earnings momentum has weakened and euro zone equities currently lack new catalysts.
  • We are underweight on Europe ex-EMU equities. The Bank of England’s more hawkish monetary policy stance has put a barrier to GBP depreciation, challenging overseas profit growth. “Brexit” negotiations remain a risk, while negotiations on new trade relations don’t seem to progress much. Britain also has a lower expected earnings growth and thus lower expected returns, this justify our negative stance.
  • We took a partial profit on our US equities exposure. We see the positive impact of Trump’s tax reform and deregulation, and improving earnings growth. Nevertheless, the US trade policy (incl. USD) appears as a major policy unknown, as risks start to materialise.
  • We have trimmed our Japanese exposure towards neutral. Visibility on an accommodative policy mix and an above-potential expansion remain positive for Japan. But, the stock market is highly correlated with the JPY performance, which, currently fulfils a safe-haven role and appears disconnected from the accommodative Bank of Japan.
  • We have become neutral on emerging markets equities. They are impacted by a tightening Fed and the geopolitical noise around the budding trade war between the USA and China. In addition, the high weighting of the tech sector (28%) is adding volatility.


  • We are underweight on bonds and keep a short duration
  • With a tightening Fed and expected upcoming inflation pressures, we expect rates and bond yields to show an uptrend towards 3% on the 10Y US government debt. In addition to rising producer prices, rising wages, fiscal stimulus and tariffs on trade could push inflation higher. The Fed will continue its hiking cycle beyond March.
  • The overall improvement in the European economy could also lead EMU yields higher over the medium term (towards 0.9% on the Bund). The ECB remains dovish in its Quantitative Easing plans and is opposed to a strong euro.
  • We have a neutral view on credit as spreads have already tightened significantly and a potential increase in bond yields could hurt performance.
  • The on-going monetary easing represents an important support for emerging market debt. 

Macro :

  • In the US, the Michigan Consumer Sentiment Preliminary came out at 115.0 for current economic conditions, down from the 121.2 level published in March.
  • Core inflation rate YoY for March came out at 2.1%, slightly higher than the forecasted 1.9% but in line with consensus. The MoM rate came out at 0.2% as expected.
  • Industrial production in the euro zone rose by 2.9% YoY in February 2018, following an upwardly revised 3.7% increase in the previous month and missing market expectations of 3.8%. Output growth slowed for intermediate, capital and consumer goods while energy production rebounded sharply. 

Equities :


Positive week for European equities.

  • Germany’s exporter-heavy DAX 30 rose for the week, despite news that the country’s exports plunged in February, largely due to the strength of the euro.
  • The UK blue-chip benchmark, the FTSE 100 index, gained about 1%, after weeks of poor performances due to the strength of the GBP.
  • Benchmark indexes in Spain, France, and Italy also ended the week higher.


Solid gains for US markets.

  • US stocks remained volatile throughout the week as investors remained focused on the turbulent political environment rather than the upcoming release of first-quarter corporate earnings.
  • The technology-heavy Nasdaq Composite index performed best, helped by Facebook’s rally, following Mark Zuckerberg’s testimony before Congress.
  • The rally of oil prices boosted Energy stocks to their highest level since late 2014.
  • Real estate and Utilities shares lagged as longer-term bond yields increased.


First weekly gains in a month for emerging equities.

  • In a surprise move Donald Trump asked his trade advisers to look at re-joining the Trans Pacific Partnership, a trade pact he withdrew from early last year.
  • At the same time, China’s stock market jumped after Chinese President Xi Jinping said Beijing would reduce tariffs on imported cars and improve intellectual property protection; steps that could ease trade tensions. But a spike in tension between Russia and the United States sent the Russian stocks down, by more than 5%
  • Turkey also had a difficult week as the depreciation of its currency in recent weeks weighed on the market. 

Fixed Income :


US treasury yields experienced some volatility last week.

  • The Trump trade war persisted last week and led to a risk-on mode, pushing treasuries yield higher, though growing geopolitical tensions in Syria led to some solace.
  • In the euro zone, with the release of its minutes, the ECB pointed towards confidence over the medium-term inflation target that could be reached with the current economic expansion.
  • However, it also revealed that the “self-sustained” conditions of inflation were still missing.
  • 10Y US, UK, Japan and German yields stood at respectively 2.82%, 1.46%, 0.038% and 0.52%.


Strong primary market.

  • Strong activity on the primary market last week despite the pre-earnings blackout period, with more than €40bn of issuance.
  • Despite geopolitical tensions, the cash bond markets saw some spread tightening, particularly on the EUR High Yield market which ended at 256 bps vs swaps (-8bps), while EUR Investment Grade cash bonds were relatively stable (52 bps).
  • Meanwhile, the Itraxx Main and Xover moved lower to 56 bps and 279 bps respectively. 


Weakening safe haven currencies.

  • As trade wars tensions abate slightly last week, safe haven currencies weakened (JPY and CHF) and commodities currencies gained (CAD, NZD, NOK, AUD) versus the EUR.
  • The SEK suffered from weaker than expected inflation data on Thursday.
  • The EUR was slightly higher versus the USD (+0.53%). 

Market :