Letter finalised at 3pm Paris time September 5-9, 2016

Transcription

1 Letter finalised at 3pm Paris time Highlights of the week Markets: German yields rose slightly on the week, while US yields pulled back slightly; the US dollar gave up ground. The euro and dollar credit markets continued to far well; with the exception of emerging markets, equities moved sideways. Eurozone: Q2 GDP growth confirmed at +0.3%, mixed signals for the beginning of Q3. United States: Sharp slowdown in activity in services. Emerging Economies (EMEs): China s August Trade and Price data surprised on the upside. Key focus ECB : qui va piano, va sano. Contrary to what we expected, the ECB ultimately did not announce any time extension for its asset-buying programme (QE), which, for now, is supposed to wrap up in March On the other hand, the Governing Council has the relevant ECB committees to evaluate the options that ensure a smooth implementation of our purchase programme. This certainly would not have been the case if the ECB were not planning to extend its QE after March 2017, because it would have been possible to find a short-term solution. Redirecting the central banks of countries that no longer have enough domestic sovereign bonds toward supranational bonds would have made it possible to keep going until March As such, it is highly likely that at the December Governing Council meeting, the ECB will announce it is extending its QE to September 2017 at least. In addition, ending QE in March 2017 would cause the euro to appreciate prematurely, which would immediately compromise the fight against deflationist pressures. You will recall that the Fed's QE "tapering" in 2014 more or less coincided with the start of the US dollar's strong appreciation. In reality, the ECB did not need to rush. Its projected inflation (1.2% in 2017 and 1.6% in 2018, instead of 1.3% and 1.6%, respectively), and growth (1.6% in 2017 and 1.6% in 2018, instead of 1.7% and 1.7%) are virtually unchanged. The Brexit victory has not sent eurozone activity off the rails, nor should it. It is important to stress that economic growth has been remarkably stable over the past two years. In addition, long-term inflation expectations and the euro's effective exchange rate - two key variables for the ECB - have also been relatively stable in recent months. That said, these two variables would be immediately affected (downward for the first, and upward for the second) if the markets were to doubt the ECB's will to continue its QE. The ECB's leisurely approach is fending off questions for a good while about potential additions of asset classes to the Eurosystem's securities shopping list, and about "helicopter money". Mario Draghi also brushed aside these possibilities during his press conference. It is now clear that PSPP rules will be changing shortly. The big question is whether the Eurosystem will abandon the capital key rule (securities purchases pro-rated to the country's weighting in the ECB's capital). Mario Draghi indicated that this measure, among others, would be looked at by the ECB s committees. For the time being, sovereign securities purchases (PSPP) have only very marginally departed from this rule, with a slight overweighting on the zone's "Big Four" countries, offsetting the proximity to the holding limit for Portuguese and Slovakian securities. As a result, the average maturity of Bund purchases has climbed gradually and was up to 11 years in August. This number will move higher still in the months to come and will contribute for some time to further flattening of the German yield curve. Abandoning the capital key rule would at least have the advantage of mitigating the pressure on German yields, which would satisfy many players, Germany included. End of QE programmes and exchange rates: the example of the Fed USD Real Effective Exchange Rate % 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% 3m. Evolution of the Fed's balance sheet (as % of GDP, R.) Source: Datastream, Amundi Research The end of the Fed s QE3 programme coincided with the beginning of the real appreciation of the dollar during the year

2 The week at a glance Other events Spain & Italy > The political horizon is not clearing up. In Spain, on Friday 2 September, Prime Minister Mariano Rajoy (conservative right) failed in his second attempt (after the first one, on 30 August) to get a minority government approved by Parliament. The opposition PSOE party (socialists), meanwhile, said they were still seeking the support of the Ciudadanos centrist party (who have backed Rajoy s attempts) and the radical left Podemos party in order to make its own attempt to form a government, but many obstacles stand in their way. If no government can be formed by 20 October, new elections will be held in late December. In Italy, the country s largest trade-union, the CGIL, which is traditionally close to the Democratic Party of Prime Minister Matteo Renzi, nonetheless recommended voting no on the reform of the Senate, which is scheduled for late November or early December (polls are still highly uncertain). Renzi reiterated that he would resign if the no wins, but that, regardless of the outcome, the next elections won t be held until late As we noted last week, these political risks could be factors of volatility but are unlikely to cut short the economic recovery (which is currently far stronger in Spain than in Italy). The most problematic scenarios i.e., participation of the radical left in the government in Spain and early elections in Italy look unlikely. TAFTA > On August 30th France called for a permanent halt to negotiations on the Transatlantic Free Trade Agreement (TAFTA) or Transatlantic Trade and Investment Partnership (TTIP)) and officially withdrew its support from the project. However, France was not able to stop negotiations, as that would require a qualified majority (based on the size of member-states) on the EU Council. Moreover, opposition is growing in Germany and the vice-chancellor appears to be sceptical, but Angela Merkel is officially still in favour of discussions. Negotiations on this agreement have been time-consuming (they began in July 2013). They have been sparked many media controversies in both their form (opacity) and their substance (NGOs, private arbitration courts able to undermine state regulations, etc.). There are still some large bones of contention, such as public procurement, the reform of arbitrage courts, and protected geographical appellations. Barack Obama, one of the project s biggest supporters, is unlikely to be present at the completion of discussions, and neither US presidential candidate has made this a campaign issue. In short, TAFTA has more and more obstacles in its path. Economic indicators Eurozone > United States > Japan > Q2 GDP growth confirmed at +0.3%. Mixed signals for early Q3. Euro zone GDP expanded by 0.3% in Q2 after +0.5% in Q1. Household consumption rose only slightly (by +0.1%) while investment and public consumption stagnated. The main positive contribution was from international trade (+0.4pp), as exports rose more (+0.5%) than imports (+0.2%). Inventory build-up made a negative 0.2pp contribution euro zone GDP growth was revised upward to 2%, due mainly to Ireland s spectacular showing (+26.3%). Real figures released during the week on July activity were mixed (with disappointing industrial output in France and, even more so, Germany, but solid retail sales for the euro zone as a whole). The Q2 slowdown was not very meaningful, as Q1 was too strong compared to the trend. Similarly, summer figures are highly volatile and likely to be revised. Remember that business climate indicators in July and August showed a slowdown in the wake of Brexit but to only a slight extent. Sharp slowdown in activity in services. The August non-manufacturing ISM was far weaker than expected, at 51.4 vs in July and 54.9 forecast, hitting a low since Its new orders component dropped to 51.4 from 60.3 in July. After already a severe disappointment in the manufacturing ISM the previous week, the non-manufacturing ISM sounded an alert that the economic slowdown could be spreading to the far larger sector of services. However, this could be a false alarm and it would have to be confirmed by a slowdown in other indicators that are representative of the underlying trend in the US economy, such as consumption and, above all, jobs. In August, the monthly survey of Economic Watchers of August, which measures the mood of business directly serving consumers, showed signs of recovery at its highest level since January. We witnessed a clear improvement in Japanese economy, as demonstrated by GDP data for the second quarter of the year, revised up by the government from 0.2% to 0.7% QoQ, due to higher-than-expected capital expenditure and inventories. In addition, first quarter data were inflated by the fact that 2016 is a leap year and adversely impacted the second quarter release. The street survey showed positive signs from companies activity and employment related Diffusion Index (DIs), while household activity DI remained sluggish. It pointed to weak consumer expenditure, increasing prices competition, and downward pressure on inflation. The economy is still benefiting from government expenditure and inbound demand, which offset sluggishness in local consumers 2

3 China > behaviour. Meanwhile, we have witnessed a rise in consumer spending since March on the back of lower food prices and a rise in real wages, supported by higher summer bonus. We are uncertain about the sustainability of the favourable trend, due to the negative impact of rising prices on consumers minds if inflationary pressures emerge. China s August Trade and Price data surprised on the upside. August FX reserves were slightly down, by USD 15.9bn, to USD 3.19trn. In terms of price data, August CPI YoY came in much lower than expected at 1.3% (vs. consensus 1.7% and prior 1.8%), and PPI surprised on the upside again (which is good) at -0.8% (vs. consensus -0.9% and prior -1.7%). In terms of trade data, China s August export growth YoY in USD terms came in better than expected at -2.8% (vs. consensus -4.0% and prior -4.4%), whereas import YoY growth surprised on the upside at +1.5% (vs. consensus -5.4% and prior -12.5%). The key takeaways from this set of monthly data are as follows: 1. FX reserves stabilized at around USD 3.19trn, as we previously expected; this is a reflection of stabilization in RMB depreciation expectation. 2. What is significant still lies in PPI improvement with 12 months of consecutive gains, supporting one of our major China bottoming calls, and we think it has a high chance to go back to positive in next month or two, which will be extremely important for a continuous corporate earnings rebound. 3. The significant pick-up in both exports and especially imports are not surprising to us, as we have already been highlighting the historical high iron ore imports in July, steel and coal imports in June, and the trend extension in August (including iron ore imports +18% YoY, copper ore imports +26% YoY, coal imports +52% YoY, and steel products +8% YoY), and we believe it will continue. We continue to hold the view the Chinese economy is bottoming out in a narrow range and that this is sustainable toward end of 2016 and into 2017, given all lagging effects of aggressive policy easing in 2015 and 1Q 2016, and potential easing remaining in 2H 2016 especially on the infrastructure front. South Africa> Turkey > Financial markets Fixed-income Foreign exchange GDP expanded more in Q2 on a QoQ basis (+0.8%, or 3.3% on an annualised basis) than in Q1 (-0.3, or annualised), driven by a recovery in mining and manufacturing on the supply side and by a rebound in exports on the demand side. Public and private consumption (respectively +1% and +1.3% YoY) also had a positive impact on growth, but total domestic demand shrank further, due to weaker private investment (-2.8% YoY). All in all, on the demand side, GDP expanded by 1.4% YoY after shrinking by 0.9% in Q1. This figure brings carry-over growth for 2016 to 0.7%, in line with our 0.8% growth forecast for Political risk remains high and could undermine this recovery if it materialises. The GDP was weaker in Q2 than in Q1 (+3.1% QoQ vs. +4.7%). While the pace of growth in spending has accelerated (+15.9% QoQ vs % in Q1), the pace of private consumption declined (+5.2% QoQ vs. +7.1% in Q1) and private investment shrank (-0.6% QoQ). Inflation came to 8.05% QoQ vs. 8.79% in Q1. The Q2 figure gives us 2.5% carry-over growth, in line with our 2.6% forecast for However, the political risk of an easing in the policy mix (cut in key rate and an aggressive hike in public spending) could weigh on foreign investor confidence, especially as new downgrades in the sovereign rating are likely. German yields rose slightly on the week, while US yields pulled back slightly. The release of a nonmanufacturing ISM that was far worse than expected diminished the probability of a Fed Funds rate hike slightly. The market is now pricing in a 28% likelihood of a Fed Funds rate hike in September, vs. 32% at the start of the week. Ten-year German and US yields ended the week at, respectively -0.01% and 1.65%. Euro zone sovereign spreads were relatively flat on the week. The stock of securities bought under PSPP and banks excess reserves have just crossed the 1000bn mark. In the coming months, the ECB will extend its QE beyond March 2017, and pressure on long German yields will remain heavy, at least until the ECB changes the way in which the Eurosystem buys sovereign bonds. The US dollar gave up ground to almost all other currencies on the week, after the release of a nonmanufacturing ISM that was far worse than expected. However, the effective exchange rates of the dollar and euro have been extremely stable for several months. The EUR/USD was only marginally affected by the ECB Governing Council meeting. The Mexican peso is one of the few currencies to give up ground to the dollar on the week. The poor non-manufacturing ISM report cast a little more doubt on the scenario of a Fed Funds rate hike at the September FOMC meeting. An analysis of the Mexican peso s trend shows that it is closely correlated to US 3

4 presidential election polls. The higher Donald Trump rates in the polls, the lower the peso trades. Credit The euro and dollar credit markets continued to far well. The disappointment with regard to the ECB s (relative) status quo was far less pronounced for bond investors than for equity investors. Credit markets have performed well since QE was set up. The Euro IG index spread has narrowed by more than 20bp. The yield on IG euro paper has hit all-time lows at about 0.6%. Note the upturn in activity on the primary market after several sluggish weeks. CSPP is a key factor in the euro credit markets performance. 20% of CSSP-eligible assets are now trading at negative yields. Accordingly, non-eligible euro market segments are being driven by bond investors (forced) quest for yield. Financial issuers in particular offer some attractive opportunities. Equity With the exception of emerging markets, equities moved sideways. The MSCI World AC was almost unchanged this week (+0%). The week nonetheless featured a rally in the oil price, with Brent gaining 5% and moving close to the $50 barrier, and the ECB s wait-and-see stance on modifying its rates or its QE procedures. The commodities rally was rather good news for emerging markets, which once again outperformed, at +2% for the MSCI EM and as much as +4% for the MSCI China (driven by encouraging PPI figures, including a receding in deflationary pressures). Among developed markets, the trend was far more sluggish, with New York up just 0.1% as of Thursday evening and Tokyo flat. In the euro zone (-0.3% by the MSCI EMU), the slight upward inkling early in the week fell victim to the ECB s status quo on Thursday. By sector, on both sides of the Atlantic the energy sector was driven by higher oil prices (+1.7% in Europe and +3.6% in the US). The Fed and the ECB are, for different reasons, holding back, and their reluctance to act is benefiting emerging markets, which are also capitalising on higher oil prices. In the longer term, the leading market (the US) is likely to set the tone. 4

5 Key upcoming events Economic indicators Auctions Key events Eurozone : Industrial production, YoY, is expected to decline in July. UK : Unemployment rate should remain stable in July. Date Country Upcoming macroeconomic data Consensus Prior 13 September Brazil Retail sales. MoM. July 0.1% Germany ZEW economic sentiment. September UK CPI. YoY. August 0.7% 0.6% China Retail sales. YoY. August 10.3% 10.2% 14 September Eurozone Industrial production. YoY. July -0.4% 0.4% UK Unemployment rate. July 4.9% 4.9% 15 September Eurozone CPI. YoY. August 0.2% 0.2% UK Retail sales. MoM. August -0,4% 1.4% US Retail sales. MoM. September 0.1% 0,0% US Industrial production. MoM. August -0.2% 0.7% US Manufacturing production. MoM. August -0.3% 0.5% 16 September US CPI. YoY. August 1.0% 0.8% Source : Bloomberg. Amundi Strategy US Consumer confidence Michigan. September Date Country Auctions of European sovereign debt [maturity, amount (if available)] 12 September France Short-term, 6.4 Bn Germany Italy Short-term, 2 Bn Short-term, 6.75 Bn 13 September Italy 3 years, 2 Bn Italy Spain Long-term, 6 Bn 14 September Germany Long-term, 1 Bn Short-term, amounts not available on Friday 15 September France Long-term, amounts not available on Friday Source: Bloomberg, Amundi Strategy Date 15 September Bank of England (BoE) 21 September Federal Reserve (Fed) 20 Octobre European Central Bank (ECB) Upcoming monetary policy committee meetings Date October 2016* Italian Constitutional Referendum November 2016 Presidential elections in the United States November 2016 OPEC Summit - Vienna, Austria Source: Amundi Strategy * Estimated Upcoming political events 5

6 Market snapshot Equity markets 09/09/2016 Over 1 week Over 1 month Ytd S&P % 0.0% 6.7% Eurostoxx % 1.1% -6.3% CAC % 0.9% -2.8% Dax % -0.8% -1.3% Nikkei % 1.2% -10.9% MSCI Emerging Markets (close -1D) % 3.1% 16.8% Commodities - Volatility 09/09/2016 Over 1 week Over 1 month Ytd Crude Oil (Brent, $/barrel) % 9.0% 31.5% Gold ($/ounce) % -0.4% 25.8% VIX FX markets 09/09/2016 Over 1 week Over 1 month Ytd EUR/USD % 1.0% 3.5% USD/JPY % 1.0% -14.6% EUR/GBP % -1.2% 14.5% EUR/CHF % 0.5% 0.8% Fixed Income markets 09/09/2016 Over 1 week Over 1 month Ytd EONIA bp Euribor 3M bp Libor USD 3M bp +22 bp 2Y yield (Germany) bp -1 bp -29 bp 10Y yield (Germany) bp +6 bp -64 bp 2Y yield (US) bp +8 bp -25 bp 10Y yield (US) bp +10 bp -62 bp Eurozone Sovereigns 10Y spreads vs Germany 09/09/2016 Over 1 week Over 1 month Ytd France +30 bp +6 bp +8 bp -6 bp Austria +19 bp -2 bp +3 bp -9 bp Netherlands +10 bp -1 bp +1 bp -6 bp Finland +13 bp bp -16 bp Belgium +23 bp -1 bp +1 bp -11 bp Ireland +46 bp -5 bp +2 bp -6 bp Portugal +315 bp +7 bp +28 bp +127 bp Spain +106 bp -2 bp -2 bp -9 bp Italy +123 bp +1 bp +3 bp +26 bp Credit markets 09/09/2016 Over 1 week Over 1 month Ytd Itraxx Main +67 bp -1 bp +2 bp -10 bp Itraxx Crossover +312 bp +2 bp +7 bp -3 bp Itraxx Financials Senior +88 bp - +2 bp +11 bp Source: Bloomberg, Amundi Strategy 3:00 pm Paris time 6

7 WEEKLY Research, Strategy and Analysis 7