{"id":74420,"date":"2018-10-15T01:42:00","date_gmt":"2018-10-14T23:42:00","guid":{"rendered":"http:\/\/beta.next-finance.net\/opinion\/capital-market-pulse\/"},"modified":"2018-10-15T01:42:00","modified_gmt":"2018-10-14T23:42:00","slug":"capital-market-pulse","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/opinion\/capital-market-pulse\/","title":{"rendered":"Capital Market Pulse"},"content":{"rendered":"<p><strong>Key points:<\/p>\n<ul>\n<li> Markets were jolted by the sharp back-up in yields, leading to the biggest correction in equities<br \/>\nin months<\/li>\n<li> We do not expect this move higher in yields to be sustained and believe the bulk of the move<br \/>\nis done<\/li>\n<li> We also expect risk assets to continue to grind higher following a healthy correction, and<br \/>\nmaintain our exposure, while continue to add diversifying strategies<br \/>\n<\/strong><\/li>\n<\/ul>\n<p><strong>Macroeconomic overview<\/strong><\/p>\n<ul>\n<li> As demonstrated by the recent jump in yields, US growth expectations are robust, even though, just a few weeks ago, questions started about when the next recession might occur. While we expect growth to slow into end of 2019 and 2020 as the fiscal stimulus fades, a recession might not come until even<br \/>\nlater. Indeed, PMI manufacturing data was softer, but still very strong, as were services. There is some concern over medium-term impact of trade and we are seeing businesses react, although it is not yet reflected in the data. Overall, while the synchronized global expansion is over, global growth remains solid.<\/li>\n<\/ul>\n<ul>\n<li> Fed Chairman Powell may have been the trigger for the back-up in yields as he was more hawkish<br \/>\nin recent remarks highlighting that the Fed could go past the \u2018neutral\u2019 level. Since then, while non-farm<br \/>\npayrolls were good, wages aren\u2019t rising much faster and inflation was a little softer than expected as<br \/>\nwell. We do not expect this move higher to be sustained, and already yields have retreated somewhat<br \/>\nfrom recent peaks.<\/li>\n<\/ul>\n<ul>\n<li> Italian budget negotiations are ongoing, as Italians don\u2019t want to bring their 2019 budget plans down,<br \/>\nmaintaining confrontation with EU policymakers. Spreads are back close to August highs, and banks<br \/>\nare under pressure again, showing investors aren\u2019t pleased by the proposed plan.<\/li>\n<\/ul>\n<ul>\n<li> Brexit negotiations are moving along, with the possibility of a deal looming closer. Both sides could<br \/>\ncome to an agreement on temporarily remaining in customs union and on Northern Ireland, sparking<br \/>\nsome optimism.<\/li>\n<\/ul>\n<ul>\n<li> Jair Bolsonaro won 46% of the vote in the first round of the Brazilian elections \u2013 not enough to secure<br \/>\noutright victory, but he is favorite to win the run-off on October 28th. He is seen as the most marketfriendly<br \/>\ncandidate, and markets were happy with the result.<\/li>\n<\/ul>\n<ul>\n<li> While we have had further good news on trade between the US &#038; Canada, who came to an<br \/>\nagreement for a new NAFTA deal \u2013 now names USMCA, trade tensions between the US &#038; China are<br \/>\nunlikely to abate anytime soon, as Chinese policymakers have said they would remain strong and not<br \/>\ncede, and President Trump happy to have this narrative into the midterm elections,<\/li>\n<\/ul>\n<ul>\n<li> The US dollar advanced on higher rates, although much of the hiking path was already priced in, and<br \/>\nwe do not expected a sustained trend higher, but broad range-trading. <\/li>\n<\/ul>\n<p><strong>Market outlook<\/strong><\/p>\n<ul>\n<li> This week\u2019s <strong>sharp sell-off in equity markets<\/strong> was most likely triggered by fears of quickly-rising<br \/>\nrates, as in February \u2013 speed &#038; scale are more important than levels. Indeed, US macroeconomic data<br \/>\nis pointing to ongoing strong growth, wages seem to be rising, and Fed Chairman Powell was more<br \/>\nhawkish than expected, leading to a sharp back-up in yields. In our view, this is an interesting move, as<br \/>\nup until recently, fears were around when the next recession would come, and when the yield curve might invert. While we do expect US growth to slow somewhat into the end of 2019 and 2020 as the<br \/>\nfiscal stimulus fades, an actual recession might not come until even later.<\/li>\n<\/ul>\n<ul>\n<li> <strong>Equity markets<\/strong> don\u2019t like sudden moves, so a 20bp rise in yields within a couple of days will create a<br \/>\nreaction, often even an overreaction. Moreover, we think markets had probably been looking for an<br \/>\nexcuse to take a breather, as trade wars had been relatively well absorbed by markets, and a sharp<br \/>\nmove in rates was an easy trigger. We expect markets to resume their grind higher in the coming<br \/>\nmonths, even if this correction continues in the coming days. Fundamentals remain robust \u2013 US growth,<br \/>\ncorporate profitability, shareholder friendly activity \u2013 which should underpin markets to some extent. We<br \/>\ncould start to see questions about earnings expectations, as current levels are not sustainable, and,<br \/>\nstarting with this Q3 season, we should see ongoing downward guidance. How markets digest this<br \/>\ntransition could lead to further volatility.<\/li>\n<\/ul>\n<ul>\n<li> We appear to have moved from a world worried about the <strong>yield curve<\/strong> inverting, and when the next<br \/>\nrecession might occur, to a world worried about higher rates in just a few weeks. However, fundamentals<br \/>\nhaven\u2019t changed much, we therefore do not expect a much bigger move from here in terms of <strong>yields<\/strong>,<br \/>\nand they could even retreat into the end of the year. Indeed, inflation data also came in softer than<br \/>\nanticipated, so we do not expect rates to back up significantly from here. We continue to look for more<br \/>\n<strong>flexible, absolute return strategies<\/strong>, but, for those less worried about duration at current levels, adding<br \/>\nmore core strategies as protection could become interesting. <\/li>\n<\/ul>\n<ul>\n<li> Credit markets handled the latest sell-off relatively well, with some widening in US HY (from very tight levels) and almost no reaction from IG. Even EM corporate spreads have proven resilient. Overall, we<br \/>\ncontinue to see any increase in volatility as opportunities in a still-expensive market.<\/li>\n<\/ul>\n<ul>\n<li> This week is a great example of the <strong>complex investment environment<\/strong> we are navigating, which comforts us in our portfolio diversification allocations, such as shorter duration, yield enhancing strategies, absolute return flexible strategies and alternatives. We expect <strong>risk assets to continue to grind higher<\/strong>, and maintain our exposure. It might not be time to add too much risk, but we don\u2019t think it\u2019s time to take it all off either. <\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>We expect risk assets to continue to grind higher, and maintain our exposure. It might not be time to add too much risk, but we don\u2019t think it\u2019s time to take it all off either.<\/p>\n","protected":false},"author":1,"featured_media":74418,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1480],"tags":[1809,1655,1657,1651,1437,2087,2068,1680],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/74420"}],"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=74420"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/74420\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/74418"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=74420"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=74420"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=74420"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}