Julius Baer: bonos mercados emergentes, Fed y oro

Redacción - Viernes, 24 de Febrero

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FIXED INCOME Emerging market bonds: Further fund inflows, tighter spreads Fund flows data shows that investors remain optimistic about the outlook for emerging market bonds. In the week that ended on Wednesday 22 February, the entire segment saw net fund inflows of USD950mn, almost all of which went into hard-currency debt. This data adds to an already clearly positive trend, as only 7 out the last 52 weeks saw net outflows. In line with that, corporate credit spreads have tightened 22 basis points (bps) year-to-date and 196bps in the last 12 months. When comparing current valuations with measures such as leverage, commodity price levels and corporate profitability, among others, EM hard-currency bonds do not look cheap, in our view.

 

In a mostly uneventful week, EM bonds benefited from lower US Treasury yields, net fund inflows and tighter credit spreads. At current valuations, we believe that the segment is not cheap.

 

Alejandro Hardziej, Fixed Income Analyst, Julius Baer

FOMC minutes revealed hike could come “fairly soon”

 

The FOMC minutes revealed a consensus among Federal Reserve members to raise rates, but the minutes offered up little clarity on the exact timing, while anticipating a hike would come “fairly soon” if inflation and labour market data are in line with expectations. Furthermore, the minutes showed that policy makers were aware of the potential lift to growth from fiscal policy, but were mostly unwilling to alter their projections until more details are known from Trump’s plan to spur economic growth. But the possibility of more fiscal spending and lower taxes by the Trump administration, lifting the economy, means the Fed could get ready to act.

 

The FOMC minutes support our view of a possible rate hike in March as confidence among the Federal Reserve hawks about better growth and rising inflation is growing.

 

Fabiano Vallesi, Next Generation Research Analyst, Julius Baer

 

COMMODITIES

 

Industrial metals: Reality check

 

The rally in industrial metals since Donald Trump’s election as president of the United States had been driven by high-flying growth expectations and his promise to boost infrastructure spending. These expectations had to face a reality check yesterday. US Treasury Secretary Steven Mnuchin stated there would only be a limited impact of the new administration’s policies on growth this year while according to Republican sources, the start of Trump’s infrastructure plan could be delayed into next year. Shortly after the elections, we argued that the potential positive impact on demand for construction materials and industrial metals would only materialise over a medium to longer-term horizon. Yesterday’s news caught traders on the wrong foot and industrial metal sold off, pushing iron ore and copper prices down by more than 3%. For copper, we continue to believe that any impact from infrastructure spending on demand should be small as less than a third of US copper demand is infrastructure-related. That said, sentiment in the copper market remains very bullish. It continues to reflect high-flying growth expectations but is also supported by the ongoing supply disruptions in Chile and Indonesia.

 

The industrial metals had to face a reality check yesterday, selling off on the news of a potentially delayed start of Trump’s infrastructure plan.

 

Carsten Menke, Commodities Research Analyst, Julius Baer

 

Gold: A very benign view on interest rate hikes

 

Gold has been trading sideways over the past two weeks, suggesting that the early-year rally has run out of steam. Prices regained some lost ground yesterday after the minutes of the most recent US Federal Open Market Committee meeting supported the view of gradual interest-rate hikes in the United States. A hike at the next meeting in March, as currently expected by us, would be a surprise to the market, but underpins our short-term cautious gold view. Overall, the environment of solid growth, higher interest and a stronger US dollar calls for fading safe-haven demand and falling gold prices, and puts the rate-hike timing into perspective. At the same time, we acknowledge the upside risks related to president Trump’s policies. Reflecting these risks, inflows into physically backed gold products have picked up since his inauguration in January, i.e. safe-haven demand has returned. Should Trump become the feared ‘unguided missile’, which we still believe is unlikely, safe-haven demand would increase even more. Signs of stagflation in the United States would create a very positive environment for gold, resulting in a falling US dollar and strongly rising prices. Those who are more concerned than us about the ‘unguided missile’ scenario could turn to the options market, where implied volatilities, the key driver of option prices, remain on fairly low levels. While long positions in out-of-the-money call options are one alternative, we see option structures with an embedded downside protection as another alternative, considering the binary risks the gold market is facing.

 

Gold has been trading sideways over the past two weeks and the market appears to take a very benign view on upcoming interest-rate hikes in the United States. We remain cautious given our expectation for solid growth, higher interest rates and a stronger US dollar but acknowledge the Trump-related upside risks.

 

Carsten Menke, Commodities Research Analyst, Julius Baer

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