This week was rather corrective on European markets (Stoxx600 Net Return : -1.7%), mainly due to the strong appreciation of the euro against the dollar (1.167), and the actual breakout of the 1.15 level.
The ECB has tried to reassure investors, arguing that it was still too early to talk about the normalization of monetary policy despite improved fundamentals, and while inflation remains at a very low level. But the market is anticipating, and an exit from Quantitative Easing is inevitable, even if the timing remains uncertain. On the other hand, uncertainty about the modalities of tapering tends to push investors out of the bond market, which increases pressure on interest rates.
On the contrary, the US markets concluded on a rise this week, taking advantage of the decline in the dollar that will benefit corporate results, while oil continues its technical rebound underneath rumors of new production cuts in the fall, and concerns for Venezuela that may fall into chaos. The US market remains driven by the Nasdaq which completely erased its recent correction and realizes new highs.
Nasdaq Composite : weekly data... new highs!
Paradoxically compared to this context, European and US rates tended to tighten this week, while the markets chose to temporize after the rise of the last two weeks which penalized the banking sector and favored the utilities. The theme of the rate hike is here to stay, but the issue of the pace of the rise will in our opinion continue to debate for many months.
Our understanding is that the rates are too low, but that their upside potential is limited. The upcoming reflation in Europe will come from lower unemployment and moderate wage increases, but structural deflationary trends (lower energy costs, robotization and AI, the effects of globalization) will limit the potential for a rise rates. In this case, the environment would become all the more favorable to the equity that the economic growth would be fairly sustained, with a lowering cost of energy and relatively low rates.
Emerging Markets Local Bonds (EBND) : weekly data
The talks on the Brexit seem deadlocked for now what worries the English business community, but not really markets, while the pound remains positively oriented in the short term against the dollar. The company's results are rather good for the moment in Europe, but insufficient upward EPS revisions lead instead to profit taking for now.
The Stoxx600 still appears to be engaged in a complex correction phase, as it is chaotic and of limited amplitude. Indeed, central banks and the rise in the euro is disturbing, while the outlook for earnings growth remains excellent. A non-directional phase of a few weeks seems therefore quite probable.
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This week was rather corrective on European markets (Stoxx600 Net Return : -1.7%), mainly due to the strong appreciation of the euro against the dollar (1.167), and the actual breakout of the 1.15 level.
The ECB has tried to reassure investors, arguing that it was still too early to talk about the normalization of monetary policy despite improved fundamentals, and while inflation remains at a very low level. But the market is anticipating, and an exit from Quantitative Easing is inevitable, even if the timing remains uncertain. On the other hand, uncertainty about the modalities of tapering tends to push investors out of the bond market, which increases pressure on interest rates.
On the contrary, the US markets concluded on a rise this week, taking advantage of the decline in the dollar that will benefit corporate results, while oil continues its technical rebound underneath rumors of new production cuts in the fall, and concerns for Venezuela that may fall into chaos. The US market remains driven by the Nasdaq which completely erased its recent correction and realizes new highs.
Nasdaq Composite : weekly data... new highs!
Paradoxically compared to this context, European and US rates tended to tighten this week, while the markets chose to temporize after the rise of the last two weeks which penalized the banking sector and favored the utilities. The theme of the rate hike is here to stay, but the issue of the pace of the rise will in our opinion continue to debate for many months.
Our understanding is that the rates are too low, but that their upside potential is limited. The upcoming reflation in Europe will come from lower unemployment and moderate wage increases, but structural deflationary trends (lower energy costs, robotization and AI, the effects of globalization) will limit the potential for a rise rates. In this case, the environment would become all the more favorable to the equity that the economic growth would be fairly sustained, with a lowering cost of energy and relatively low rates. Emerging Markets Local Bonds (EBND) : weekly data
The talks on the Brexit seem deadlocked for now what worries the English business community, but not really markets, while the pound remains positively oriented in the short term against the dollar. The company's results are rather good for the moment in Europe, but insufficient upward EPS revisions lead instead to profit taking for now.
The Stoxx600 still appears to be engaged in a complex correction phase, as it is chaotic and of limited amplitude. Indeed, central banks and the rise in the euro is disturbing, while the outlook for earnings growth remains excellent. A non-directional phase of a few weeks seems therefore quite probable.