The week ahead: Targeting 2000 points – a new milestone

Heinz Ruettimann, Analyst, Bank Julius Baer - Miercoles, 30 de Julio

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The focus this week is again on the US Q2 earnings season. However, as incoming results have largely beaten expectations so far, the focus may be more on the S&P500 trying to break through the 2000 level, a new milestone. On the economic front, market-moving indicators to watch are the manufacturing index and the Federal Open Market Committee (FOMC) announcement. The latter may be especially relevant for the direction of the USD. In Europe an additional 100 companies will report their Q2 earnings results, allowing a first conclusion to be drawn by the end of this week. Market-moving indicators to watch are Eurozone inflation data and the manufacturing index. In the emerging market world, the focus is on China and whether the market will keep up its positive momentum from last week.

Conclusion:

 

The S&P500 may - for the first time ever - reach 2000 points. The FOMC announcement and Eurozone inflation data will be relevant for the USD. The Chinese equity market is likely to keep its positive momentum.

 

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FIXED INCOME

 

US government bond market: As dull as it can get?

 

Quotes to be attributed to: Markus Allenspach, Head Fixed Income Research, Bank Julius Baer

 

With the yield of the benchmark 10-year Treasury note at 2.48% this morning, the eternal bulls are stilling arguing for a further yield decline of 2% to get to the Japanese levels. In particular, they argue that there is absolutely no reason to worry about the forthcoming meeting of the rate-setting FOMC on Wednesday since there is no reason in their view for the Fed to alter its policy. Admittedly, the annual rate of increase of consumer prices has stabilized at 2.1% in June, and the widely watched core personal consumption expenditures (PCE) deflator stands only at 1.5%. The bulls also draw support from the comforting comments from Fed Chair Yellen that there is still ‘slack’ in the US economy. It should be noted that in the days of Ben Bernanke, it has never been the Chairman announcing a change in trend, but his ‘lieutenants’. And the regional Fed bank presidents continue to warn the market that the next interest-rate hike could come earlier than the market is anticipating.

 

Conclusion:

 

We continue to forecast higher US bond yields in the medium term. Investors need to be aware that incoming data is consistent with growth at or even slightly above the trend rate. Liquidity will become even scarcer in riskier segments, and we still recommend reducing positions in mature market high-yield bonds. We still like Treasury inflation-protected securities (TIPS), emerging market investment-grade corporate bonds and selected local-currency debt.

 

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COMMODITIES

 

1) Commodities reverse almost entirely early year gains

 

Quotes to be attributed to Norbert Ruecker, Head Commodities Research, Bank Julius Baer

 

The Bloomberg Commodity Index (formerly the Dow Jones-UBS Commodity Index) has fallen more than 5% over the past month, erasing almost entirely the gains made in the first half of the year. The decline has been principally driven by sharp falls in agriculture, natural gas and oil prices. Large plantings earlier in the year combined with very favourable weather across most key growing regions result in the prospects of bumper harvests. Despite the past weeks’ slide in grain and oil seeds prices, we see further downside risks in the near term as official yield estimates are likely to be revised upwards. Weather conditions in North America are also the driving force of the sell-off in natural gas prices. Summer cooling de-mand on power plants remains subdued as summer temperatures are moderate while natural gas output continues to grow robustly. With prices approaching USD3.5 per million Brit-ish thermal units, we are warming up to a more bullish stance on natural gas. Oil prices retreated from last month’s highs since supply fears have not materialised and sentiment cooled from exceptionally bullish levels. Our outlook for commodities remains neutral and we still recommend an underweight position within an investment portfolio. There are few reasons to own a tactical position in commodities: the business cycle is not advanced enough for the asset class’ diversification benefits to materialise while the fading super cycle should continue to push prices gradually lower over the coming years.

 

Conclusion:

 

We maintain our neutral outlook and underweight recommendation on commodi-ties. The business cycle is not advanced enough for the asset class’ diversification benefits to materialise while the fading super cycle should continue to push prices gradually lower over the coming years.

 

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2) Indonesian copper exports to partly resume

 

Quotes to be attributed to: Carsten Menke, Analyst Commodities Research, Bank Julius Baer

 

In January this year, Indonesia implemented its ‘Mining Law 2009’, prohibiting exports of unprocessed mineral ores in order to promote domestic processing. This brought copper exports from two major mines to a standstill and led to extensive negotiations between the mining companies and the Indonesian government. According to newspaper reports, the company operating the giant Grasberg mine received an export permit over the weekend and plans to resume shipments in August. Taken together with stabilising growth in China, the Indonesian export ban helped tightening the copper market balances in recent months. With exports resuming and further supply growth reaching the market, we believe the cop-per market balance should loosen again going forward. We expect prices to move lower again and to exploit today’s low volatility environment, we recommend buying a December 2014 put spread with strike levels at USD 6,800 and USD 6,600 per tonne.

 

Conclusion:

 

While the sustained economic recovery creates tailwinds for base metals demand, they continue facing headwinds from growing supply. We see downside for copper from current levels and recommend buying a December 2014 put spread.

 

 

 

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