Julius Baer: Crecimiento en Eurozona, Trump, divisas y renta fija

Redacción - Martes, 31 de Enero

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ECONOMICS Eurozone remains on solid growth path Today’s eurozone advanced GDP estimate for Q4 2016 will signal continued robust economic growth. Our own estimate of 0.4% quarterly growth is very close to consensus expectations, and better than expected economic confidence released yesterday suggests that the solid expansion will continue into the current quarter too. Spanish and Belgian GDP figures for the final quarter released yesterday also paint a picture of solid economic activity. Inflation estimates are creating a sense of reflation as the headline rate will most likely rise to 1.5% in January. But the stable core inflation at 0.9% sends the clear message that inflation in the eurozone is picking up due to higher energy prices alone. The labour market is slack and keeps wage growth depressed. The bottom line of today’s figures is that they help to improve the sentiment for eurozone assets, including the euro, but do not license speculation on a more hawkish European Central Bank (ECB). Support for the euro should there-fore be rather fleeting. We finetune our three-month EUR/USD forecast to 1.04 from 1.03 previously.

Good economic data should improve the sentiment for the euro but are not sufficient to push the ECB onto a more hawkish path. We stick to our neutral view on EUR/USD.

 

David Kohl, Chief Currency Strategist and Head Economist Germany, Julius Baer

Easy like Sunday morning

 

• Issuing decrees is the new tweeting. So far Trump’s pattern has been clear: focus on easy targets first. Hence despite the outcry, the economy and markets are gaining traction.

• We downgrade real estate as bond proxies and upgrade insurance stocks. Reiterating the call on small-cap stocks and the USD.

 

An esteemed and very experienced client of ours suggested to me a very simple rule of thumb: use the trade balance to tell apart US friends from US foes. According to this view, countries with small imbalances to the US are set to receive friendly treatment by the new administration. In contrast, countries with great trade surpluses to the US make great enemies. Russia and the UK with relatively small imbalances fit the bill of the former and have gotten a nice treat by Trump so far. Mexico and Germany (or rather its car industry) got the exact opposite. I do have sympathies with this view as it sounds both in line with election rhetoric and recent empirics. Yet as we just debated in our team: what about the elephant in the room – China? ‘A billion a day keeps the doctor away’ seems to be the exception to the rule as China has been printing an annual USD360bn surplus against the US. Yet so far Donald Trump has not dared to attack it. And certainly not just because it is Chinese New Year. Interesting to see whether he will come back on this one. The size of both the trade balance itself and the amount of Treasuries China holds make it seem rather unlikely. So the pattern is: bash trade surpluses, but pick only the weak ones as they are the easy targets. Easy like Sunday morning.

So without major disruptions between the US and its most important trading partner, we think the global economy will continue to do what it has started in the second half of 2016: recovering. We expect that investors will come back to this fact after the whole hullabaloo of tweets and decrees settles. So after a reality check and the back and forth in expectations, we expect the major trends to resume. That is higher rates, a stronger USD and outperformance of cyclical stocks. In the meantime, we closed a tactical opportunity in real estate stocks, so-called bond proxies, and increased our rating for insurance stocks, beneficiaries of rising rates. We reiterate our preference for the USD in particular against the JPY and for small- and mid-cap stocks. Our technical analysts suggest going for specific single equities.

 

Christian Gattiker, Chief Strategist and Head Research, Julius Baer

 

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US pre-Trump cyclical performance: Not bad at all

 

• Contrary to headline readings, US growth and durable orders data reported for the period before the Trump inauguration were actually very positive, once special effects are filtered out.

• A firming US economic backdrop will oblige the Federal Reserve to express its determination, at its upcoming policy meeting on Thursday, to continue its steady rate normalisation in 2017.

 

Last Friday’s release of US gross domestic product (GDP) growth for the fourth quarter of 2016 disappointed, with only 1.9% quarterly annualised growth, after 3.5% in Q3. In addition, headline durable goods orders were negative again month-on-month in December, instead of growing positively, as was expected. Has the US economy been slowing again at the start of the Trump presidency? Well, not really. Leading indicators with data before Donald Trump’s inauguration, like the Institute of Supply Man-agement (ISM) purchasing managers’ surveys, signal strong momentum and even a cyclical acceleration in the first quarter of 2017. Last quarter’s US GDP growth was not as weak, as it seems at first glance: it actually showed strong domestic demand with broad-based ongoing consumer spending, a strong recovery of housing investment and an acceleration of business investment. A surge of imports, by an annualised quarter-on-quarter 8.3%, against a drop by 4.3% of exports, pushed net exports into the negative and took a full 1.7% out of GDP headline growth. This drop of exports came from soybeans, which had boosted overall exports by 10.0% in the previous quarter, adding 0.85% to overall GDP growth. Still incomplete US trade data for the fourth quarter suggest an upward revision of net exports ahead. With regard to durable goods orders, which are a leading indicator, one should look through the December headline figure and focus on the core data: excluding aircraft and defence, which are volatile, core durable goods orders showed the fastest monthly pace since July 2015, growing at 0.8%. Overall, the US already has been showing strengthening domestic growth, before any of Trump’s economic stimulation attempts. Therefore, the Fed will be determined at its upcoming policy meeting on Thursday to stick to its already-signalled three rate hikes of 0.25% in 2017, starting in March. Steady rate normalisation will bolster the USD in 2017.

 

Janwillem Acket, Chief Economist, Julius Baer

 

 

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Policy divergence dominates G3 currencies

 

• The US Fed’s readiness to tighten policy in response to an improving growth outlook contrasts with the ECB’s reluctance to tighten policy so as to prevent EUR/USD from moving higher.

• The divergence between US and Japanese monetary policy is expected to widen further, justifying a bearish yen view.

 

Policy between the US on the one hand and the eurozone and Japan on the other continues to diverge. In particular, the US Fed’s tightening policy contrasts with the decision of the Europe-an Central Bank (ECB) and the Bank of Japan (BoJ) to continue their negative interest-rate policy. Short- and long-term interest-rate differentials reflect this divergence, translating into weakness of the euro and the yen. We expect this divergence to be close to be exhausted in the case of the euro. The eurozone economy shows some decent growth, and inflation is picking up as well. The economic developments are a challenge to the ECB’s promise not to taper its asset-purchasing programme. The ECB’s leader-ship is becoming increasingly disunited on this topic. The EUR/USD downside is therefore limited over the next three months and is largely based on a busy political agenda, with election in the Netherlands, France and Germany. We fine-tune our EUR/USD forecast to 1.04 in three months, while sticking to our neutral qualitative view.

Policy divergence between the US and Japan remains more pronounced and could widen further. We stick therefore to our bearish view for the yen and forecast USD/JPY at 121 in three months. While the growth backdrop in Japan appears as encouraging as that in the eurozone, underlying inflation and wage dynamics remain considerably weaker. The Bank of Japan’s commitment to its negative interest-rate policy and its zero 10-year yield target is hardly challenged. We expect the yield spreads between US and Japanese government bonds to widen further, driving the yen lower. The unsettling and erratic policy actions by US President Donald Trump are a risk to our negative view on the yen due to its role as a safe-haven currency. On the other hand, a capitulation of the ECB, which is facing a better economic cli-mate, is the biggest risk factor for our benign cautious view on EUR/USD.

 

David Kohl, Chief Currency Strategist and Head Economist Germany, Julius Baer

 

 

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FIXED INCOME

 

Target-2 balances widen

 

The current situation in the eurozone is hard to interpret. On the one hand, incoming economic data point to a broadening of the economic recovery, with the EU Commission sentiment survey reaching a multi-year high and data pointing towards an improvement in peripheral economies. On the other hand, monetary data show that tensions within the eurosystem are rising. The spread between 10-year German Bunds and their peers in France and Italy is widening, as are the imbalances within the eurosystem’s real time settlement system, or Target 2. The imbalances result from money flowing only into one banking system and not being recycled. We had seen such imbalances growing in 2011/2012 and we have to admit that they are reaching the old highs again.

We maintain our call for European bank debt but the growing imbalances within the eurosystem serve as a reminder that this is not a consensus call, but conditional on a further deepening of the European economic recovery.

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

 

 

 

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Pressure on Greece to close the second review is mounting

 

Yields on 10-year government bonds of Greece rose by 40bps to 7.5% as the pressure to close the current review is rising. Prime Minister Tsipras remains confident that the second review will be completed soon; however, the institutions continue to refuse any disbursements without the financial participation of the International Monetary Fund (IMF) in Greece’s bailout programme. The IMF remains firm in its stance that Greece’s debt is unsustainable and the fiscal targets paired with the programme beyond 2018 are harsh and unfeasible, so without debt relief the IMF will not participate in any programme for Greece. Two-thirds of the actions needed for the next disbursement are not completed yet and we are waiting to see what will be discussed at the next Eurogroup on 20 February.

The Greek saga is likely to remain in the headlines until a mutual agreement among all institutions is found and the second review is completed. Elections in various member states during the coming months may also delay any possible solutions.

 

Eirini Tsekeridou, Fixed Income Analyst, Julius Baer

 

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US corporate bonds: Heavy supply as issuers lock in low rates

 

• Supply of new bonds accelerates as issuers want to lock in low rates before the Fed raises them again.

• We maintain our call for credit risk as USD high-yield bonds and senior loans benefit from the outlook for lower default risk.

 

We maintain our call for riskier segments of the bond market to benefit from the momentum of the US economy. Incoming economic data are consistent with a further decline of the default rate of US speculative-grade issuers and thus bode well for a further compression of credit spreads.

Bond yields of higher quality segments, such as investment-grade corporate bonds and government debt, are exposed to upward pressure. The upward pressure not only results from the prospect of three Fed rate hikes this year, followed by another three rate hikes in 2018. It is also caused by the massive acceleration in the new issue activity. According to data compiled by Moody’s (the rating agency), January’s new issue volume could reach the high-est level in six years. Seemingly, corporate issuers want to lock in low yields and are rushing to the capital market.

The acceleration of new issues is already visible in the more generous conditions the issuers have to offer. Despite the good economic news flow, the credit spreads of investment-grade bonds are not compressing; rather, they are widening slightly in response to the higher supply.

We feel comfortable with our call for credit risk in this environment and focus on USD high-yield bonds and US leveraged loans. The latter instrument is much less liquid than the former but has a shorter duration, which is optimal for periods of rising money market rates.

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

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