Weekly Insights 4/23/2018


  • US: Lower than anticipated Empire State Manufacturing index.
  • Euro zone: Core consumer prices increased by 1% in March YoY.
  • Asset Allocation: We have added some GBP to our portfolios.

Asset Allocation :

The rising yield and inflation story is back again as the main focus for investors. Recently various other events where in centre stage - such as concerns about protectionism - but rising commodity prices have been intensifying lately.

Two weeks ago the price of oil (Brent) was trading at USD67 per barrel and 10Y Treasuries were at around 2.78%. 10 days later oil reached USD73 per barrel and treasuries broke the 2.90% level. Oil is at its highest price since December 2014 and the US 10Y bond yields are within shouting distance of their mid-February highs, a peak since late 2013/early 2014. In the meantime, the probability (92%) of a June Fed rate hike is now almost certain.

In this context, we keep our short duration positioning and remain vigilant on an unexpected acceleration in inflation. At this stage, however, we do not expect the ECB to tighten its communication at the upcoming meeting but rather adopt a “wait and see” attitude until mid June.

Our current investment strategy on traditional funds:

grey : no change
blue : change


We have kept our exposure to equities unchanged.

  • 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 are neutral on the euro zone region. 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.
  • 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 have a neutral stance on US equities.
  • 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 Empire State Manufacturing Index decreased to 15.8 in April from 22.5 in the previous month, below market expectations of 18.8. A slowdown was seen in new orders, shipments, unfilled orders and employment.
  • Industrial production rose by 0.5% in March, as a rebound in utilities offset low output of machinery and food products. In the twelve months through March, overall industrial output rose by 4.3%.
  • In the euro zone, core consumer prices increased by 1% in March YoY. Prices of food, alcohol & tobacco rose less than initially thought.
  • In Germany, the ZEW Indicator of Economic Sentiment fell sharply by 13.3 points to (-8.2) in April 2018, missing market expectations of -1. It was the lowest reading since November 2012.

Equities :


Positive week for European equities.

  • Markets continued their rebound last week, supported by positive corporate earnings reports and economic data.
  • Mining, Financials and Basic resources stocks were notable outperformers mid-week.
  • Consumer goods and oil and gas companies were notable underperformers by the end of the week.
  • Germany’s export-heavy DAX 30 index and France’s CAC 40 index ended the week higher, rising on Tuesday to their highest closes since early February.


Second consecutive week of positive results for US equities.

  • Markets were supported by the early release of corporate reports with 69 of the constituents of the S&P 500 Index publishing figures, along with several hundred reports from smaller firms.
  • According to data and analytics firm FactSet, 80% of the S&P 500 companies that have reported quarterly earnings to date have posted better than expected results.
  • The energy sector posted strong returns for another week, boosted by the continuing oil prices rally.


Barely positive week for Emerging equities.

  • Tech stocks took a tumble as the world’s largest contract chipmaker Taiwan Semiconductor Manufacturing cut its revenue target to the low end of forecasts, blaming softer demand for smartphones.
  • Korea was in an upbeat mood due to the news that the new US Secretary of State met with North Korean leader Kim Jong Un to discuss a planned summit with US President Donald Trump.
  • The commodity rally helped lifting the broad Commodity Research Bureau (CRB) index towards its highest level since July 2015, a support for Latin American stock markets.

Fixed Income :


US treasury yields moved higher over the past week.

  • With rising commodity prices, fears on a trade war between the US and its main trading partners easing and risky markets settling down, US yields moved higher.
  • In the euro zone, German yields rose on the back of their US counterparts and peripherals outperformed their core peers.
  • The Italian BTP outperformed over the week as the formation of an eurosceptic government seemed less likely.
  • 10Y US, UK, Japan and German yields stood at respectively 2.92%, 1.48%, 0.06% and 0.59%.


Credit markets tightened over the week.

  • The earnings season continued and showed strong figures.
  • The primary market was active last week, with +/- EUR 7bn of non-financials issued and over EUR 6bn of senior financials. Two AT1 were also issued : KBC et Bawag.
  • The cash bond markets saw some spread narrowing, particularly on the EUR High Yield market which ended at +294 bps, while the EUR Investment Grade cash bond market was relatively stable (at +92 bps).
  • Non-financials outperformed Financials by 2 bps (Sub Insurance suffered the most with roughly +7bps over the week).
  • The derivatives markets saw some respite from the previous week with the ITRAXX main remaining flat at 58 bps and the ITRAXX XOVER moving lower to 273 bps.


Slightly stable EUR vs the USD last week.

  • Feeble trend last week on commodity currencies (AUD, CAD and NOK).
  • The release of a weaker than estimated inflation data for New Zealand pushed the NZD down last week.
  • The GBP was hurt by weaker inflation data and more split within the Bank of England on rate cycle. 

Market :