Weekly Market Focus 05 September 2018 CONTENTS Asset class review... 2 Forex... 3 Views from the trading floor... 4 Calendars... 5 Contacts... 6 Disclaimer... 7 Follow us on LinkedIn H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 1
ASSET CLASS REVIEW US stock market Large-cap equities have generally continued to make headway in the US since the end of July, despite the fact that they have fallen in much of the rest of the developed world. This has occurred even though the dollar has strengthened against other major currencies, which would normally coincide with US equities underperforming their peers in other advanced economies. This divergence is probably the result of worries about US protectionism. Safe-haven flows stemming from these concerns have supported the dollar. And investors seem to have concluded that protectionism is less of a threat to US-based firms than those in other advanced economies, so US equities have continued to climb as US economy has remained in good health, boosting expectations for earnings. Historically, equities in the US and other advanced economies have rarely moved in opposite directions for long. We think that this time will be no exception, as US equities also come under pressure. In our opinion, China s response to further US tariffs will take a greater toll on the US stock market. Government Bonds In the US and Germany, the yield of 10-year government bonds has fallen by about 10bp since the end of July. In the UK, the yield appears to have risen by a similar amount. But this just reflects a change of benchmark. The yield of the previous benchmark has actually fallen. This is not the case in Japan, though, where the yield has indeed risen by 5bp since the BoJ tweaked the wording of its language in relation to its target for the yield, implying that it may allow the yield to fluctuate more around zero percent. The rally in US, German and UK 10-year government bonds has probably continued to be driven by concerns about a global trade war. Estimates of risk-neutral Treasury yields and term premiums support this view. Since the end of July, term premiums are estimated to have fallen significantly across the yield curve. By contrast, risk-neutral yields are estimated to have risen slightly. Analysts are not convinced that the 10-year yield in the US has peaked yet, partly because there is still some scope for rising interest rate expectations to push it up this year. Credit Markets The credit spreads of US corporate bonds have risen slightly since the end of July. The average option-adjusted spread (OAS) over US Treasuries of investment-grade bonds has climbed from just over 115bp to a little above 120bp. Meanwhile, the average OAS over US Treasuries of speculativegrade bonds has increased from slightly more than 345bp to nearly 350bp. Some analysts think that growth will slow in the US next year, without forecasting a recession. If they are right, spreads are unlikely to balloon in the way that they did a decade or so ago when the economy slumped. But corporate bond yields should increase significantly, as they have tended to do in the past ahead of economic downturns. Other things could also put upward pressure on spreads in the meantime. In the past, the trigger has often come out of the blue. Examples include the LTCM (Long Term Capital Management) crisis in the late 1990s, and the corporate accounting scandals of the early 2000s. Meanwhile, credit spreads have also climbed on average in the euro-zone, but edged down very slightly in the UK, since the end of July. H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 2
FOREX CHF EUR GBP USD JPY INR A bout of safe-haven demand has prompted a sharp appreciation in the Swiss franc in August, moving it further away from the symbolic CHF 1.20: EUR level it depreciated earlier in the year. A further appreciation seems unlikely as political risk in the euro area recedes and the European Central Bank signals moves towards tighter policy in the euro zone. This move in EUR/CHF may make the SNB more cautious about moving away from its loose policy stance. For some time now EUR/USD has been languishing in the area of 1.1600. That may well continue for some time. One possible reason for the current EUR strength is also coming to an end: Eurozone is losing momentum. That is not the end of the world and is likely to improve as soon as next year. But at least there is no real economic reason for additional EUR strength. The pound fell a fourth day against the dollar as investors turned their attention to Bank of England Governor Mark Carney s testimony to the Treasury Select Committee later, amid speculation he plans to extend his term, following reports that he is in talks about remaining in the role beyond his planned departure date next June. It takes the view that the policy continuity that would ensue under Governor Carney extending his term would be supportive for sterling (and short-term U.K. rates) as it would reduce a source of policy uncertainty over the next 3-6 months. The greenback is gaining ground on a risk-off atmosphere emerging from Emerging Market. Argentina is the center of the attention. The troubles in Emerging Markets push the US Dollar higher on a risk-off atmosphere. The big elephant in the room remains the No. 1 Emerging Market and the world s second-largest economy: China. The US is set to impose whopping tariffs worth $200 billion of Chinese good as early as September. The move would serve as a severe escalation in the trade wars. US President Donald Trump cut off a planned media outing on Monday to make phone calls related to trade. Weak inflation points to continued low interest rates. The fact that the inflation trend in Japan has weakened in recent months evidently confirmed this assumption. In June, the core rate based on consumer prices was only 0.2%. At its July meeting the central bank lowered its inflation forecasts again on the back of the weak price trend. As the BOJ wants to maintain its expansionary approach until inflation has even exceeded its 2% target temporarily, enabling it to anchor inflation expectation at a higher level. It is admittedly difficult to predict the timing of the upward movement in USD/JPY and EUR/JPY. GDP grew 8.2% in Q2. That beats the 7.6% median estimate. Indian economy has continued recovery sharply from demonetisation-gst slump last year and a strong growth augurs well for the rupee assets. However, turmoil in Emerging Market as well as high oil prices are bigger factors that can continue to drive the rupee away from domestic positive factors. H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 3
VIEWS FROM THE TRADING FLOOR Equity S&P was flat on the last week, with a slight increase in volatility from 12.50 to 13.16. No significant (more than 5%) rise last week, while on the downside we found copper and tire & rubber both down more than 8% and gold was down 6%. It is now official, we are not only at the highest historical level, we are also in the longest bull market (3466 days) as we are now a few days longer than the internet bull market. Though it is the longest in history, it is not the strongest as we are only up 330% while it was 417% for the internet one. On the economical side, investors will watch closely the monthly employment report released on Friday. S&P 500: The index still remains on track to reach its first target 2950. Any correction should test the 2873 support. A break of this level will lead to the 2800 support before 2740 (the bottom of the uptrend initiated in February 2016). Eurostoxx 50: The index is back on its 3340 support and testing it. As long as the index will stay in the range 3310-3525 there is not much to expect. The lower part of the range is a good buying point on the long term while 3525 is take profit level. A break below 3310 should lead to 3261 before 3190. EQUITY Developed countries Total return - 1 Week SMI -2.1% Euro Stoxx 50-3.5% DAX -3.5% FTSE 100-2.3% S&P 500-0.2% Dow Jones -0.3% Nikkei 225-1.2% Developing countries Russia/Micex -0.6% India/Nifty 50-1.8% China (HK) -3.9% FIXED INCOME Developed countries 2-year Yield 10-year Yield USA 2.7% 2.9% UK 0.8% 1.5% Germany -0.6% 0.4% France -0.4% 0.7% Italy 1.0% 3.2% Spain -0.3% 1.4% Switzerland -0.8% -0.1% Developing countries 2-year Yield 10-year Yield Russia 3.9% 5.0% - Upward move - Downward move COMMODITIES Total return - 1 Week Crude Oil 1.4% Gold -1.4% H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 4
CALENDARS Economic Events Date of release Domicile Event Period Actual Estimated 5 Sept 2018 US Initial Jobless Claims September 213k 213k 5 Sept 2018 US Unit Labour Costs 2Q -0.9% -0.9% 5 Sept2018 Germany 7 Sept 2018 Spain Current account balance Industrial output YoY July 20.0b 26.2b July 0.5% 1.3% H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 5
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