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US prices continue to rise, with the US consumer price index (CPI) for October coming in at its highest in three decades. President Biden made a boldly worded response as inflation becomes a growing focus among politicians with their eyes fixed on next year’s midterm elections. Oil prices fell on investors’ expectations that the US could free up strategic reserves to combat energy inflation. At the same time, bond yields rose on the back of the CPI release, but the yield curve flattened and real yields touched new lows. This suggests either that bond investors still consider the inflation spike as transitory or that they see possible monetary tightening (justified by the CPI numbers) as a policy mistake that would kill the recovery—or both. Whilst bond

Last week, the US GDP growth figure for Q3 came in lower than expected, while prices moved higher than anticipated and the US Employment Cost Index update rose at its fastest pace in 31 years. The headline increase was driven by the biggest surge in wages since 1982, up 1.5% in the third quarter. Substantial productivity gains would be required now to offset this rise in wages. Without gains in productivity and/or a fall in labour costs, there could be a risk to the Fed’s message about “transitory” inflation pressures. We expect the Federal Reserve to announce plans to taper its quantitative-easing programme following its meeting this week. Meanwhile, Christine Lagarde last week pushed back on market bets on rate hikes, meaning the European Central Bank is

After September’s negative performance, last week proved one of the strongest in a while for equity markets. This rebound followed news that the Biden administration will start to tackle the supply-chain and logistics issues that have been preventing deliveries. The ports of Los Angeles, the busiest in the US, will begin operating around the clock seven days per week to ease cargo bottlenecks that have led to shortages and higher costs for consumers. Showing some relaxation in long-term inflation fears, 10-year US Treasury yields declined slightly last week.  Such ongoing supply issues, in addition to labour shortages across the US economy, have also driven up the cost of US shale oil production, further reinforcing strong crude oil prices. This has helped send

China’s high-yield bond crisis continued last week, with yields on the ICE BofA index of Chinese high-yield US dollar bonds moving above 18% at one stage last week, the highest level in a decade. Further nervousness was caused by one real-estate issuer’s decision not to reimburse USD200 mn of offshore bonds–despite having USD4 bn in cash on its balance sheet. This suggests the company in question favours domestic investors and its own cash needs over its offshore creditors. Investors are now scrutinising other Chinese issuers with special attention to Evergrande, which is well through a 30-day grace period before its offshore investors can declare a default. Elsewhere in Asia, although subsequently batted away, hints from Japan’s new prime minister of a rise in

As expected, last week the European Central Bank hinted at a “moderate” reduction of the bond buying it undertakes as part of its Pandemic Emergency Purchase Programme (PEPP). But ECB president Christine Lagarde refrained from providing a precise timeline and she was adamant that a reduction in PEPP purchases did not mean the ECB would tighten financing conditions. Indeed, the ECB could well compensate smaller PEPP purchases by beefing up its regular asset purchases. For now, the ECB, like the Federal Reserve, seems to be happy to cultivate a certain ambiguity about tapering plans. This is understandable: covid variants remain a concern and forward indicators are beginning to turn south. But recent big jumps in inflation, amid persistent global supply problems,

The rosy US employment picture helped push equities to a new high as US inflation moderated in July. Those looking to fill roles now exceed those looking for work, compelling some small and mid-sized companies to raise wages. Higher prices seem to be keeping the US consumer in check, however, with consumer sentiment hitting its lowest level in a decade. We will be watching how this evolves given the US consumer’s key to the growth recovery story. The US earnings season concluded on a high note, with an impressive 88% year-on-year (y-o-y) earnings per share (EPS) growth for the S&P500 index. For the full year, EPS growth for the index is expected to be 45.8% in 2021, followed by 9.4% for 2022. However, depending on how President Biden’s tax plan pans out, the 2022

M&A (mergers and acquisitions) activity is on the rise, as companies coming out of the pandemic with strong balance sheets shop for buying opportunities. Last week ACS, a Spanish construction group, approached Italian transport company Atlantia to buy Italy’s largest motorway network. Two big funds are also eyeing Dutch telecommunications company KPN as a potential acquisition target. M&A is one of our 2021 investment themes and we like event-driven hedge funds for this play.
The European covid vaccination effort is picking up speed and at the current rate, the European Commission’s target of a 70% vaccination rate by September is within sight. This improved outlook seems to be shared by markets, as the European 5y5y inflation swap has reached its highest level

Signs from last week’s SURE programme to finance partial unemployment schemes are highly encouraging for the EU’s plans for recovery fund issuance which could start, we believe, in mid-2021. Last week’s SURE issue was close to 14 times oversubscribed at a rate lower than that for French government bonds of comparable duration. We believe this sale marks the arrival of a major new sustainable asset that benefits from the highest rating. An increase in ECB bond buying in December (made all the more likely by the challenges presented by the resurgence of covid-19) will further sustain interest in European fixed income.
Examples of consensus in Washington have been all too rare over many years, but the US Department of Justice’s lawsuit against Google for

Donald Trump’s poll numbers were looking increasingly unhealthy at the time of writing, but at least the cocktail of drugs administered to the coronavirus-stricken President appears to have worked. This is encouraging news in the fight against the virus and a considerable achievement for Regeneron, whose founders increased their stake in the company after a French pharma group pulled back earlier this year. At this point, markets are increasingly taking on board the probability of a Biden victory – an eventuality that would at least provide some clarity and open the way for further fiscal stimulus. Nonetheless, we still believe there is a risk that the election is contested and/or inconclusive—and whatever the talk of a ‘Blue Wave’, it is uncertain whether the

The impact of political tensions on business is ever more apparent: LVMH of France will not, after all, proceed with the purchase of Tiffany of the US. If, as seems likely, the hand of the French government was involved, this is solid evidence that political sensitivities are increasingly influencing cross-border deals – something that is likely to remain the case just as M&A in general has been declining.
Volatility is on the rise across most assets, particularly equities (although we are still some way off March levels). Sovereigns are not so vulnerable due to massive central bank intervention – some might say manipulation. With government bonds under control, we are increasingly seeing market views expressed through FX markets. Nowhere has this been more

The sell-off in stocks last week showed a certain nervousness about the sharp run-up in tech stocks and the role of big option bets. Indeed, prices in some instances had risen too fast. But this was a technical correction. With the US tech titans generating free cash flow, we do not believe we are facing a repeat of the bursting of the dot-com bubble in 2000.  And yet, it could be that Tesla’s ambition to raise USD5bn through occasional share sales will be seen as marking a kind of high-water point—especially as the approach of the November election increases market nervousness. A Biden win, plus seizure of both houses of Congress by the Democrats, could mean higher taxes and more regulation. Although we believe the probability for such a scenario is still low,

In spite of renewed fears of coronavirus clusters in Beijing, data last week suggested the more consumer-oriented sides of the Chinese economy were tracking improvements in industry, with a year-on-year increase in auto sales in May. UK retail sales were also encouraging, but the biggest surprise came from the US where May’s 18% rise in retail sales month on month was double analysts’ expectations. Popular metrics like pedestrian, air and auto traffic, credit card spending and restaurant reservations likewise indicate the US consumer is alive and kicking. We still believe it is too early to sound the all clear and will continue to track corporate defaults and unemployment trends, among others. But a robust post-pandemic recovery could well bring relief to cyclical

Last week, German chancellor Merkel delivered a surprise about-face when she and French president Macron announced a proposal for a EUR 500bn recovery fund in the wake of the coronavirus crisis. The unprecedented plan involves the distribution of grants, rather than loans, to member states in economic need. The deal is far from done, however, as it is currently opposed by the EU ‘frugal four’, who insist on loans rather than grants, which would over-indebt countries like Spain and Italy. The European Commission will propose its own plan this week, with a final agreement during the EU Council in mid-June. Meanwhile, as lockdown restrictions eased across the euro area, purchasing manager indices for May recovered from April’s record lows, despite remaining in

The CIO’s view of the week ahead.Mario Draghi has now done (nearly) all that it takes to support the euro area economy. With only weeks left in his term as ECB president, Draghi deployed almost all that remains in the central bank’s toolkit. Following last Thursday’s meeting, he confirmed not only the expected interest rate cut, but also the relaunch of the quantitative easing (QE) bond-buying programme. He fell short of lifting issuer limits, which markets took negatively. Christine Lagarde, who takes over the ECB helm next month, will need to address this issue in order to sustain this round of bond-buying beyond nine months, as until then, there is a one-third limit on the amount of outstanding bonds the central bank can hold from any single country. For now, Draghi’s last act has

The CIO’s view of the week ahead.Having purged 21 moderate Tory members of parliament (MPs) who opposed him on Brexit, Boris Johnson has had to face the resignation of two high-profile members of his government, Amber Rudd and his own brother, Jo Johnson. British politics will provide more excitement this week, as a law is passed in parliament to prevent a no-deal Brexit. We feel the latest developments lower the probability of a no-deal Brexit on 31 October and support a temporary rebound in sterling. Given also that we expect fiscal stimulus in most scenarios, we have moved from an underweight stance to a neutral one on UK equities, although the possibility of election-related turbulence means we remain prudent.  Upbeat news last week included the announcement of high-level US-China

The CIO’s view of the week ahead.Last week’s ousting of Matteo Salvini’s Lega from the Italian government and its replacement by the centre-left Democratic party holds out the prospect of much less-heated budgetary discussions between Rome and Brussels this autumn and lessens the risk that Italy’s sovereign rating will be cut by Moody’s this week. Helped also by the prospect of a substantial stimulus package from the European Central Bank, Italian bond yields and yield spreads sank last week and Italian equities outperformed. Of course, it remains to be seen how long the new coalition lasts. Mr Salvini is lurking just around the corner.Boris Johnson’s five-week suspension of parliament in a bid to deliver Brexit on 31 October is guaranteed to cause ructions in the House of Commons this

The CIO’s view of the week ahead.Last week’s ousting of Matteo Salvini’s Lega from the Italian government and its replacement by the centre-left Democratic party holds out the prospect of much less-heated budgetary discussions between Rome and Brussels this autumn and lessens the risk that Italy’s sovereign rating will be cut by Moody’s this week. Helped also by the prospect of a substantial stimulus package from the European Central Bank, Italian bond yields and yield spreads sank last week and Italian equities outperformed. Of course, it remains to be seen how long the new coalition lasts. Mr. Salvini is lurking just around the corner.Boris Johnson’s five-week suspension of parliament in a bid to deliver Brexit on 31 October is guaranteed to cause ructions in the House of Commons this

The CIO’s view of the week ahead.Last week was so full of market-moving news that ordinarily major events took the backseat. Critically, trade tensions escalated rapidly from Friday, with China announcing tariff retaliations of the order of between 5% and 10% on USD 75bn of US imports from September. Trump took to Twitter in turn, raising both current and planned tariffs to 30% on USD 250bn and 15% on USD 300bn worth of Chinese imports. This puts an already fragile global economy in greater peril, with markets correcting sharply as a result, before rallying again on Monday. Although we do not see a market collapse on the imminent horizon, we are happy with our underweight in equities and neutral position in US bonds as a recession hedge.At the same time, while the central bankers of the

The CIO’s view of the week ahead.The global economy is a bag of mixed signals. Last week, US retail sales for July came out stronger than expected, proving the US consumer remains in good shape. Hopefully, this will buoy the US economy, as it suffers elsewhere, including manufacturing and business investment. Meanwhile, data out of China and Germany, the world’s second and fourth largest economies, proved more worrying, underlining concerns about global industry as trade tensions continue to take a toll. The good news is that while the German economy shrank in Q2, the broader euro area economy appears relatively healthy, driven by the consumer. The Chinese economy on the other hand, is suffering from both weakening industrial production and retail sales.This position of relative economic

The CIO Office’s view of the week ahead.The knock-on effects of Trump’s tweets have jumped from the equity and bond markets to the economy to central banks and now currency markets. Indeed, the trade war turned tech war now increasingly resembles a currency war and a race to the bottom. The Chinese currency depreciated below CNY 7/USD after the Chinese authorities seemingly let the currency weaken on the back of Trump’s latest tariffs announcement, earning them the ‘currency manipulator’ designation by the US Treasury Department. The weaker renminbi will have a deflationary impact on the global economy, while at the same time partially offsetting the adverse economic effects of Trump’s latest tariffs on the Chinese economy.With negative-yielding bonds now composing over a quarter of the

The CIO Office’s view of the week ahead.After a brief lull, Trump renewed escalating trade tensions with China by threatening new tariffs on USD 300bn of Chinese imports to the US. A global sell-off ensued and the Chinese authorities now appear less inclined to resist renminbi weakness relative to the dollar, having allowed the renminbi to break the CNY7/USD “psychological threshold”. Unsurprisingly, exporter-heavy indices were hit particularly hard in equities, as investors fled to safety, adding further pressure to the US 10-year Treasury yield. At the same time, Japan put fresh trading restrictions on South Korea, adding fuel to the global trade war fire. Removing South Korea from its “white list” will in effect impose new trade restrictions on Japanese exports to South Korea,

The CIO Office’s view of the week ahead.There is a new sheriff in London Town and he is not shy with bold statements. So far as prime minister, Boris Johnson has not only pledged to take the UK out of the EU by 31 October – “no ifs or buts” – but has also signalled new tax cuts and spending plans, ranging from the police and the national public health service, to nationwide full-fibre broadband. While certainly popular issues, they also come with considerable price tags that government coffers grappling with tax cuts and the potential economic costs of a no-deal Brexit could struggle to cover. We are cautious UK Gilts, lest a new era of fiscal stimulus transpire. The EU has its hands full with weakening sentiment, as indicated by falling euro area PMIs, which again disappointed in July.

The CIO Office’s view of the week ahead.In his testimony to Congress last week, Fed chairman Jerome Powell delivered a dovish report, reinforcing current expectations for a rate cut later this month. He focused on mounting risks to the US economy due to slowing global growth and persistent trade uncertainty over June’s strong US jobs report. Despite a higher-than-expected CPI inflation print for June, consistently low inflation remains the central bank’s main concern. Because the Fed is clearly on course to prolong the US business cycle as long as possible, we do not see a recession as imminent and think the looser monetary policy will support US equities, although an earnings recession could come sooner. We also think the US dollar will see moderate depreciation over the next 12

The CIO Office’s view of the week ahead.Christine Lagarde stole headlines this week with her unexpected nomination to succeed Mario Draghi at the ECB. Both equities and bond markets rallied sharply around the world on the news. Given Ms. Lagarde’s past history of support for the ECB’s easy monetary policy, her appointment was taken as confirmation that the ECB will continue on its renewed dovish course after its new president takes the helm. In our view, Lagarde’s political background could go a step further in lending support to coordinated fiscal stimulus. With this and Italy avoiding an Excessive Deficit Procedure by the EU Commission, we like European high yield and have moved our position to neutral on the asset class.Banks will be first up to report Q2 earnings. After US banks

The CIO Office’s view of the week ahead.The headline event at last week’s G20 summit in Osaka was the bilateral meeting between the Chinese and US presidents to discuss trade. After their last meeting ended in a stalemate, the world waited to see who would be first to blink. The rather anticlimactic outcome was that both sides have agreed not to add any new tariffs for now. The only real positive news is that Trump agreed to a partial lift on the Huawei ban, although without any clarity on what that means in practice. However, we at least have a timeout on the tech war. Meanwhile, Russia announced an agreement on oil production cuts with Saudia Arabia, sending oil prices higher. We are positive on energy as a result. Key to watch this week are the US ISM figures, after China’s weak Caixin

The CIO Office’s view of the week ahead.Last week, Mario Draghi made waves in Sintra at the European Central Bank’s (ECB) annual symposium. The ECB president gave a very dovish speech, vindicating markets’ high expectations and eliciting Trump Twitter censure. Draghi came as close as possible without actually committing, declaring that the central bank stands ready to act by using all instruments and flexibility at its disposal within its mandate. We now expect the ECB to adjust its forward guidance in July to indicate that policy rates will remain at present levels or lower through at least the first half of 2020. We also expect the central bank to cut the deposit rate by 10 basis points to -0.5% in September. As a result, we are turning more positive on European credits.In the same

The CIO Office’s view of the week aheadAs uncertainty continues to run high, so does anticipation around the Fed’s meeting this Wednesday. The Fed is now confronted with a dilemma: economic data is not soft enough to merit rate cuts, as evidenced by last week’s US retail sales data. However, inflation expectations have reached new lows, adding pressure on the Fed to cut. Meanwhile, markets have priced in two rate cuts for the year, the first for July. While the Fed is widely expected to deliver dovish guidance, how far they go will be decisive in terms of the timing of any cuts. So far, the Fed’s dots still indicate rate hikes next year. If market expectations for cuts are not met, we could see a jump in market volatility. Unless US-China trade talks completely derail, we expect a first

The CIO office’s view of the week ahead.ECB president Mario Draghi has gone as dovish as possible without cutting rates, saying for the first time that he is prepared to cut interest rates and redeploy quantitative easing before he leaves the bank this autumn. Any interest rate rise in Europe will not happen until the second half of 2020 at the earliest, he suggested. As global uncertainty around trade remains elevated, the outlook for large exporting economies like Germany looks every more precarious. This has prompted policy makers around the world to prepare to support their economies however they can, with Draghi pledging to “use all the instruments that are in the toolbox” to support euro area growth.In the US, dovish noises have come from Federal Reserve chair Jay Powell, who said

The CIO office’s view of the week ahead.Last week, President Trump announced a 5% tariff on all imports from Mexico to take effect from 10 June unless the Mexican government moves to stem illegal immigration across the US-Mexico border. This rate could then rise by 5% each month to reach 25% by October if the US is not satisfied with Mexico’s response. Mexico has been one of the beneficiary countries of the US-China trade war, its trade balance with the US widening as China’s narrows. Markets have corrected as recession risks have increased, with the S&P 500 suffering one of its worst months in May. We maintain our puts in portfolios as the global outlook deteriorates.Bonds on the other hand, have outperformed, with the short end rallying aggressively, allowing gold to rise. At the same

The CIO office’s view of the week ahead.As the results of European Parliament elections roll in, some unexpected outcomes are taking shape. While populists across the Union did win new seats, they did not fare as well as expected, while Green parties gained significant ground as voter turnout rose for the first time in four decades. Surprises at the country level could also lead to greater political instability for some constituents. In Greece, Alexis Tsipras’s Syriza party defeat means the Greek prime minister will likely call early elections, while in Germany the rise of the Greens has pushed the Social Democratic party into third place for the first time in nationwide elections. In the UK, Theresa May’s resignation last Friday and the Brexit party’s victory in European Parliament