November\u2019s leading indicators show a fresh short-term
\nacceleration in the world economy beyond the 4%
\nmark. This growth pace is well above potential (3.5%) and
\nshould lead to renewed inflation and validate the
\ntougher stance on monetary policy across most
\ndeveloped markets. The economists\u2019 consensus is for a
\ngradual normalization in yield curves in the G7 under the
\ncautious leadership of central banks. Against this
\nbackdrop, our asset allocation remains resolutely
\noffensive, but includes some selective plays reflecting the
\nhighest risks (overvalued markets) and our doubts on the
\nlikelihood of a soft landing for global monetary expansion. <\/p>\n
It is worth remembering that the strong and synchronized
\ngrowth we are witnessing worldwide is the result of a
\nsuccessful adjustment by emerging markets after large
\ndevaluations in 2014-2015 (external adjustment, then
\ndisinflation and interest rate cuts, recovery in consumer
\nspending), Chinese banking stimulus in 2015, reasonable
\noil prices (US shale) and lastly, monetary abundance from
\nEurope and Japan, which is spilling over into the rest of
\nthe world via capital outflows by their institutional
\ninvestors. Yellen\u2019s Fed has admittedly implemented some
\nfaint-hearted monetary tightening, but capital inflows
\nhave fueled euphoria on US asset markets (equities, High
\nYield credit, real estate) to the extent that this has
\ncancelled out the effects of key rate hikes on financial
\nconditions. The strength of the global recovery
\nautomatically means a turnaround in all these factors. <\/p>\n
Lastly, excessive monetary stimulus is almost spent out in In the US, the stimulus provided by tax reform is set to be November\u2019s leading indicators show a fresh short-termThe emergence of bubbles (real estate, bonds), which
\nthreaten social stability, has already forced China to put
\nthe brakes on bank liquidity.<\/quote>
\n The consequences of this
\nshockwave have rippled out across the entire Pacific Ring
\nof Fire as we expected, with a contraction in the building
\nsector in China, a decline in commodities prices (coal, iron
\nore, industrial metals), a shift in real estate bubbles in
\nAustralia, New Zealand, Canada and the US West coast,
\nand a hit on exports in Peru and Chile. A number of large
\nemergings that seemed to be dragging themselves out of
\ntheir rut in 2017 could be hit by another recessionary
\nshock due to the drop in commodities prices (Brazil,
\nIndonesia, South Africa). Oil will also act as a recessionary
\nfactor for developed countries in 2018 if prices remain
\nabove $60 as OPEC hopes.<\/p>\n
\nEurope and Japan. In the euro area, the ECB is coming
\nclose to the issue share limits it set itself to avoid accusations of monetization of public debt. Tapering of the
\nPSPP should come to an end in late 2018 in our view. In
\nJapan, the BoJ\u2019s monetary artillery (qualitative and
\nquantitative easing, negative interest rates and yield curve
\ncontrol) is running up against technical limitations (dryingup
\nof JGB liquidity, lack of equity ETF), the virtual
\ninsolvency of regional banks (flat yield curve), the risk of
\nbubbles (commercial real estate) and the likely return to
\npositive core inflation. We expect the 10-year yield target
\nto be raised from 0 to 0.15% in 1H, once US tax reform
\nhas been ratified. This will involve a fresh slowdown in JGB
\npurchases by the issuing institution. Synchronized
\ntapering by both the BoJ and the ECB should resteepen
\nthe yield curves in the euro area and Japan, with a knockon
\neffect for the US 10-year yield, as the G3 bond markets
\nare inter-connected. <\/p>\n
\ndrowned out by a rise in inflation, a soaring trade deficit,
\nrate hikes from the Fed and the surge in the dollar. The
\nrise in long-term rates triggered by tapering in Japan and
\nEurope will dent valuations for both equities and real
\nestate. The shock on long-term rates should only be
\ntemporary as domestic long-term investors (insurers and
\npension funds) have already changed their marginal
\ninflows away from equities and into bonds (equity
\nweighting target reached as a result of market rally), and
\nthe increase in mortgage rates will soon dry up the source
\nof fixed-rate MBS issues. The combination of high rates
\nand rising budget deficit will particularly accentuate the
\nshortage of dollar-denominated liquidity across the rest of
\nthe world, which is already dented by Basel III, with the
\nrisk of triggering a short squeeze on emerging markets\u2019
\nexternal debt. This US policy mix profile harks back to the
\nReagan\/Volcker era, after which the Third World debt crisis
\nfollowed hot on the heels. <\/p>\nWe maintain our overweight stance on risky assets via
\nequities in the euro area, Japan and emerging Asia, along
\nwith European credit (IG and HY) and European peripheral
\ndebt, but maintain our underweight position on assets
\nexposed to Chinese real estate risk and the dollar\u2019s rise
\n(emerging debt, Latin-American equities, industrial
\nmetals).<\/quote>
\n Our currency positions (long USD vs. EUR, CHF,
\nAUD) are a telling reflection of our view of a world where
\nthe dollar\u2019s exchange rate has superseded the VIX as the
\nsynthetic risk aversion indicator. <\/p>\n","protected":false},"excerpt":{"rendered":"
\nacceleration in the world economy beyond the 4%
\nmark. This growth pace is well above potential (3.5%) and
\nshould lead to renewed inflation and validate the
\ntougher stance on monetary policy across most
\ndeveloped markets.<\/p>\n","protected":false},"author":1,"featured_media":68165,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1483],"tags":[1809,1655,1651,1807,2068,1678],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/68167"}],"collection":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/comments?post=68167"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/68167\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/68165"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=68167"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=68167"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=68167"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}