Comentarios Julius Baer: Bonos Eurozona | BCE | Renta Fija EE.UU. | Oro | Energía Limpia

Redacción - Miercoles, 24 de Enero

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Eurozone bonds: Riding the upgrade wave • Spain and Greece upgraded by one notch, to A- and B, respectively. • We see value in segments not distorted by ECB purchases, such as subordinated debt of solid European banks.

 

Fitch upgraded Spain’s sovereign credit rating by one notch to A-from BBB+ with stable outlook and Standard & Poor’s (S&P) upgraded Greece’s rating to B from B- with positive outlook. Fitch mentions that Spain continues to benefit from the strong economic recovery, with lower unemployment rates, lower government deficit, a current account surplus and improved competitiveness. Nevertheless, external leverage and general government debt/gross domestic product (GDP) are still high, while the political risk involving Catalonia’s independence has not fully subsided. Regarding Greece, S&P took the improved growth and fiscal outlook into account, combined with a recovery in the labour market and reform progress. If Greece maintains adequate liquidity buffers to prefinance its future debt needs, if official creditors provide significant debt relief upon the bailout programme’s expiry in August 2018 and if conditions improve for both the sovereign and the Greek banks, then another upgrade is not to be excluded. We take into account that Greece has no material debt repayments due until mid-2019 and the government shows commitment to reforms which should allow for further improvement and stability in the economic and political environment.

While the upgrades represent improving fiscal and economic environment, yields in eurozone government bonds will continue to remain artificially low as long as the European Central Bank (ECB) continues to purchase government bonds and non-financial corporate bonds as part of its monetary stimulus programme. The ECB’s asset purchasing programme will expire in September 2018 and we still expect the ECB to wait until 2019 before raising rates. Until then, we only regard subordinated debt of solid European banks as attractive in the region.

 

Eirini Tsekeridou, Fixed Income Analyst, Julius Baer

 

 

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ECB: Hawkish rhetoric to be scaled down

 

• Stronger euro, softer trend inflation and shrinking room for positive economic data surprises should motivate the ECB to shift to a more dovish rhetoric this week.

• Gradual policy normalisation in the eurozone contrasts with straight rate hikes in the US acting as a headwind for EUR/USD.

 

Rhetoric from the European Central Bank (ECB) sphere was rather hawkish over the past few weeks, resulting in very bullish euro sentiment and new highs in EUR/USD. Following its council meeting this week, we expect the ECB to scale down its hawkish rhetoric and to become more balanced by shifting to a more dovish stance. It is in the best interest of the ECB to reemphasise a strictly gradual approach when it comes to scaling down its monetary stimulus. The underlying inflation trend has slowed recently and the strengthening of the euro is increasingly creating headwinds for economic growth – in particular in the weak peripheral economies. At the same time, growth expectations for the eurozone are now much higher than in the past, setting the bar fairly high for additional positive economic news out of the eurozone. We expect the ECB to proceed as announced with its monthly asset purchases until September this year and then phase out the programme. While a marginal deposit rate hike is possible already this year, moving up the main refinancing rate and a more distinct rate action policy are topics for 2019.

A renewed focus on the gradual approach regarding the normalisation of monetary policy in the eurozone should underpin the contrast to US monetary policy. We recently increased the number of expected rate hikes by the US Federal Reserve (Fed) in 2018 to three. Upbeat US economic news, including a higher than expected gross domestic product (GDP) reading at the end of this week, sharply increases the probability of even a fourth rate hike by the Fed this year and puts pressure on EUR/USD in the next weeks. While progress towards a stable pro-European government in Germany is adding to the positive EUR sentiment, the price for political stability seems to be a further departure from supply-side economics in Germany, creating a longer-term burden for productivity and eventually for the value of the euro.

 

David Kohl, Chief Currency Strategist, Julius Baer

 

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Fixed income: US government bonds: kicking the can down the road – but just a little bit

 

US Congress reached an agreement yesterday to end the government shutdown. Senators from the Democratic party supported another Continuing Resolution (CR) that allows funding of the government until 8 February. The deal was later sanctioned by the House and the President. The Democratic Party has achieved its primary target to ‘celebrate’ the President’s first year in office with a shutdown, but not much more than that. The situation of the ‘Dreamers’, some 800,000 people brought to the US as children who now face deportation, has not been solved. It must be kept in mind that the real test for the bond market will come in late-February when the administration is running out of cash, barring an increase or the suspension of the statutory debt ceiling. That said, the bond market reacted positively on the news, with the yield of the 10-year Treasury note moving down to 2.64% again.

 

The debt ceiling will become the real litmus test for the bond market. We recommend to use any volatility to build up positions in long-dated Treasury bonds, as we expect the bulk of the refinancing need to be satisfied with short-dated paper and the yield curve to flatten accordingly.

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

 

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Gold: In ‘currency mode’

 

• Gold’s current strength is the mirror image of the US dollar’s weakness. It hardly reacted to the government shutdown.

• Expecting a rebounding dollar, we still remain cautious on gold. Rate cycle headwinds should fade as the year progresses.

 

Gold rallied around the turn of the year but seems to have entered into a consolidation. At around USD 1,330 per ounce, prices are at the upper end of the past years’ trading range. Gold’s strength is the mirror image of the US dollar’s weakness, which is at its lowest levels in around three years. Yet, gold hardly reacted to the shutdown of the US government as negotiations between Democrats and Republicans drag on. Whether or not the shutdown will have an impact on the gold market largely depends on its duration and implications on the US economy. Judging by the prevailing positive sentiment in financial markets, e.g. US equities reaching new all-time highs, it seems as if it is not considered a major concern. Looking back at the previous shutdown in October 2013, it did not have a positive impact on gold. Prices were down during the shutdown and temporarily rebounded thereafter be-fore resuming their longer-term downtrend.

The close relationship between gold and the dollar is mainly due to sluggish physical demand. Gold imports by China and India, the world’s two largest consumers, recovered more recently but remain below levels reached in prior years. Central bank buying has cooled while safe-haven seekers stayed on the sidelines given the favourable backdrop in financial markets. Simply put, gold trades in ‘currency mode’ rather than ‘commodity mode’. While the dollar is unlikely to return to its peak, we still see upside as strong growth should be accompanied by rising interest rates in the United States. This should weigh on gold over the coming months, justifying an unchanged cautious view. These short-term rate cycle headwinds should fade as the year progresses. With the dollar expected to eventually roll over and upside pressure to bond yields easing, medium- to longer-term bottom-fishing opportunities should open up. Sustainable upside should materialise once growth concerns creep into financial markets and revive the investors’ demand for gold as a safe haven.

 

Carsten Menke, Commodities Research Analyst, Julius Baer

 

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Clean energy: US trade tariffs become reality

 

The clean energy business provides proof for the US government’s more protective stance on trade. Earlier this week President Trump approved the tariffs proposed late last year on solar cell and module imports, against alleged dumping namely by Chinese manufacturers. The final outcome roughly matches expectations, respectively is better than some feared, and in consequence the impact on solar stocks has been benign so far. The tariffs raise the costs namely of utility-scale solar power plants and annual installations this year should fall below last year’s levels. Generally, 2017 was an exceptionally strong year in terms of power plant additions globally. Solar installations rose to record levels, especially because demand in China soared ahead of policy change. The global market should see a dent this year which clouds the outlook for solar stocks. Clean energy has come of age and is growing out of subsidy dependence. However, most electricity markets are oversupplied and power plants underutilised. Clean energy is unlikely a growth market going forward but remains a highly cyclical and competitive business with a poor track record in delivering sustainable returns to investors. We stick to our neutral view on clean energy overall but still like the long-term fundamentals of power plant operators, so called ‘yieldcos’. However this clean energy growth niche is increasingly trading at rich valuations.

 

The United States imposes tariffs on solar imports, largely as expected, and thus the impact on solar stocks has been benign. Clean energy has come of age thanks to market-competitive costs but power-plant overcapacities cap market growth. We maintain our neutral view and see ongoing consolidation in a business characterised by low and fluctuating margins.

 

Norbert Rücker, Head Macro & Commodity Research, Julius Baer

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