The CIO office’s view of the week ahead.Last week was eventful, with Italian bond spreads rising sharply on the threat of fresh elections and then partially recovering when a government was eventually formed. We do not think that the crisis engulfing Italy has ended. After the summer, the new populist government’s unfunded fiscal plans could put Italian bond yields under renewed pressure. In spite of the downfall of Spanish prime minister Mariano Rajoy, there is less to worry about in Spain than in Italy: growth is healthier, debt is lower and, unlike Italy, budget plans have already been ratified. Interestingly, Spanish bond spreads over Bunds actually narrowed last week. Overall, however, recent developments in Italy have made us more cautious on the prospects for peripheral euro area
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Cesar Perez Ruiz considers the following as important: Investment review, Macroview, market outlook, Market review, Weekly View
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The CIO office’s view of the week ahead.
Last week was eventful, with Italian bond spreads rising sharply on the threat of fresh elections and then partially recovering when a government was eventually formed. We do not think that the crisis engulfing Italy has ended. After the summer, the new populist government’s unfunded fiscal plans could put Italian bond yields under renewed pressure. In spite of the downfall of Spanish prime minister Mariano Rajoy, there is less to worry about in Spain than in Italy: growth is healthier, debt is lower and, unlike Italy, budget plans have already been ratified. Interestingly, Spanish bond spreads over Bunds actually narrowed last week. Overall, however, recent developments in Italy have made us more cautious on the prospects for peripheral euro area bonds.
In spite of the best efforts of Donald Trump, the situation in the US looks far more settled. Our conviction we are now seeing a bounce back in growth from a relatively anaemic first quarter is backed up by the strong nonfarm payroll figures and business sentiment indexes for May. We therefore remain bullish on US equities, but bearish on US Treasury bonds as inflation and interest rates march higher (albeit at a reasonable rate).
The relative strength of the US economy, together with political uncertainty, has supported a strong dollar and putting emerging markets under pressure again. There are interesting opportunities in individual emerging markets, and compelling entry points are steadily appearing. But with important elections coming up in Latin America, we need more political clarity. In particular, we need to see whether the populist candidate Andrés Obrador wins the Mexican presidential election in July. The current social conflict and electoral uncertainties in Brazil make us pause before we enter that market. We also need more clarity on where trade relations are going. We do believe the Americans will eventually arrive at sort of trade accommodation. But will a bilateral deal come at the expense of other nations?
Cesar Perez Ruiz, Head of Investments & CIO