Julius Baer _ Eurozona, política fiscal EE.UU. y metales

Redacción - Martes, 28 de Marzo

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ECONOMICS Eurozone: Further improving business climate • Eurozone business climate in March is improving further, signalling robust growth. • Speculation about the end to negative deposit rates justifies a more constructive euro view. 

 

The preliminary March readings of the purchasing managers’ index in Germany, France and the eurozone delivered positive surprises. The positive data should allow the speculation about an earlier end to the negative deposit rates to gain traction. We expect eurozone growth to have accelerated in the first three months of the year to 0.6% q/q after 0.4% in the last quarter of 2016. The full-year consensus of gross domestic product growth estimate (1.6%) for 2017 appears fully justified given the high degree of business optimism. Despite the encouraging growth backdrop, the eurozone is far from overheating allowing the European Central Bank (ECB) to remain committed to the zero main refinancing rate. The preliminary inflation rate for March - which will be released later this week - has likely declined, highlighting the transitory nature of the most recent inflation pick-up. 

We expect the ECB to allow further speculation about a less pronounced negative deposit rate. The ECB had indeed moved the deposit rate without changing the main refinancing rate in the past – the last cut (10 basis points) was undertaken in December 2015. We upgraded our EUR/USD forecast slightly on the back of the growing probability that the deposit rate will be changed from minus 0.4% to minus 0.3% this year. We forecast EUR/USD at 1.08 in three months and stick to our 12-month outlook of 1.07. The new forecast implies a neutral to slightly constructive qualitative view for the euro and a growing conviction for a strong Japanese yen. The yen strength should be temporary since the Bank of Japan remains committed to its negative interest rate policy and continues to target bond yields close to zero percent.

 

David Kohl, Chief Currency Strategist

 

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STRATEGY

 

Overweight eurozone, underweight US 

 

• From a fundamental perspective, there are several reasons why the eurozone equity market will outperform that of the US.

• As a consequence, we upgraded eurozone equities to Overweight and downgraded US equities to Underweight.

 

Eurozone equities started to outperform the US market in mid-2016. The relative performance of the two regions in a global context shows that the US has been a long-term outperformer but is now confronted with a tiring trend while the eurozone is starting to pick up from very low levels. We see a number of reasons for the trend to continue going forward. From a timing perspective, we remain of the opinion that an eventually benign outcome of the French presidential elections (i.e. an Emmanuel Macron victory) could be an additional positive trigger for eurozone equi-ties. From a relative perspective, we have thus upgraded euro-zone equities to Overweight and downgraded US equities to Underweight.

 

Our models suggest that we will finally see positive earnings growth again in 2017 and 2018 on a global basis. While the model for the US shows an increase between 6% and 8%, the eurozone model even results in roughly 2% higher growth each year. An improving eurozone earnings backdrop also becomes visible when we look at our earnings indicators (combined earnings revisions and earnings optimism). Not only is earnings growth slightly superior in the eurozone, but also the valuation levels. The relative Price/Earnings of the eurozone to the US is roughly one standard deviation below its long-term average. As a consequence, the expectedly higher eurozone index potential is not only fuelled by superior earnings growth, but also by supportive valuation metrics. The other factors supporting our view include the USD influence or the equity cycle, which is well advanced in the US and clearly lagging in Europe.

 

Christoph Riniker, Head Equity Strategy Research, Julius Baer 

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FIXED INCOME

 

US fiscal policy: After the backlash over healthcare reform

 

• Backlash over the healthcare reform does not imply an end to the tax debate. We still see room for realistic rate cuts in the current calendar year.

• We maintain our call for more rate hikes and higher government bond yields. Therefore, we stick to our call for shorter duration and see any dips of riskier segments as a buying opportunity.

 

President Trump could not “repeal and replace Obamacare” as planned, which is seen as a bad omen for his next project, tax cuts. In the election campaign, Trump had promised to halve the corporate tax rate and trim the income taxes. We all know that this would be supportive for the profit outlook of corporates and for private consumption, but at the expense of a higher revenue shortfall over the shorter term. The problem is that the same group that brought down Trump’s healthcare reform is also call-ing for a balanced budget and might oppose any tax cuts. There-fore, a growing number of market participants argue that Trump will not be able to cut taxes in the foreseeable future, which ex-plains why the yields on the 10-year and 30-year Treasury bonds have fallen 0.1% to 2.36% and 2.97% in a week’s time. There is talk in the market that a decline to 2.3% and 2.75%, respectively, is in the cards. 

 

We do not share this negative view on the fiscal policy and the yield outlook. Our take is that the Trump administration will take the lesson learned from the healthcare reform and work on a more realistic tax cut proposal, i.e. cutting tax rates rather than reforming the tax system. The debate will intensify as we approach 28 April, when the current continuing resolution (CR, a temporary budget deal) expires. If no new CR is agreed, the US administration would face a government shutdown. We cannot rule out that the anxiety ahead of this budget date could lead to some weakness in the riskier segments of the bond market. Even without the healthcare reform, we still regard the outlook for the US economy as satisfying.

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

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COMMODITIES

 

Iron ore and steel: Fears of a property slowdown

 

Speculative traders in China’s iron ore and steel futures markets have been rushing for the exits on signs that the recent correction is extending. Prices are down another 4% and 2.2% since the end of last week, most likely due to concerns about looming demand weakness from the property sector. There has been constant news flow about property tightening in China as of late, intended to cool the overheated markets in or around the top-tier cities. While China’s property market enjoys a surprisingly strong recovery, lasting into this year, demand should fade over the coming years due to a slowdown in urbanisation. With around 40% of steel demand related to property, this should lead to gradually declining steel production and weigh on the steel mills’ demand for iron ore. At the same time, iron ore supplies from the world’s two largest producers, Australia and Brazil, should continue to grow. Signs of oversupply have been emerging again as of late with Chinese port inventories rising to the highest levels since at least 2004. We believe that both iron ore and steel prices are still too high on current levels and remain at risk from profit-taking in the futures markets. That said, speculative futures positioning on the Chinese exchange is much more difficult to gauge as there are no statistics available. We remain cautious on iron ore while reiterating our three- and twelve-month price target of USD 75 and USD 60 per tonne. 

 

Fears of a looming slowdown in the property market put pressure on Chinese iron ore and steel prices as speculative traders have been rushing for the exit. With prices still too high compared to the fundamental backdrop, profit-taking remains a risk. We see the markets well supplied and remain cautious.

 

Carsten Menke, Commodities Research Analyst, Julius Baer

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