Cross-Asset Weekly
03 March 2017
A stronger cyclical upswing brightens the outlook
Contacts
Our growth forecasts have become more otimistic for most countries, as we see a
global cyclical upswing that should support solid expansion for the year. We also
revised upward our projections for inflation, as prices have increased in recent months.
Dr. Karsten Junius, CFA
Chief Economist
[email protected]
+41 58 317 32 79
As a result, we now expect a Fed hike in March, but no change in the ECB forward
guidance, as the inflationary pressure should abate in the late spring. The trend to
higher bond yields is expected to resume in Q2, with some notable exceptions – belowpotential growth in Switzerland is likely to elicit more policy action by the SNB with a
rate cut in 1H17, as upward pressures on the Swiss franc continue.
The steady flow of good news also underpins the uptrend in global equity markets
which should last till the end of 1H17. Sentiment is starting to look somewhat
ebullient, and a mild correction in 2Q17 would cool off overheated short-term
sentiment. In credit markets, tight valuation and elevated new issuance could hinder
the performance of the Asia High Yield sector in the near term, and we continue to
prefer higher quality Asian IG bonds
This week’s highlights
Monthly forecast changes
Not just a “Trump effect”: cyclical forces strengthen the outlook for global growth
2
Federal Reserve Preview
The opportunity for a March rate hike
3
ECB Preview
4
Rising headline inflation does not justify a change in forward guidance at the March meeting
Global Rates and FX
Bond yields to continue rising in Q2
5
Swiss Macro
Swiss 4Q16 GDP falls short of expectations on weak exports
7
Global Equity Strategy
The music is still playing, when it stops, buy the pullback
9
Emerging Market: Asia High Yield Bonds
Expect the rally to take a breather
1 | Cross-Asset Weekly
11
Adolfo Laurenti
Global Economist
[email protected]
+41 58 317 30 86
Ursina Kubli
Forex Strategist
[email protected]
+41 58 317 32 80
Cédric Spahr, CFA
Equity Strategist
[email protected]
+41 58 317 31 28
Dr. Florian Weber, CFA
Fixed Income Strategist
[email protected]
+41 58 317 31 14
Emiliano Surballe, CFA
Emerging Market Credit Strategist
[email protected]
+41 58 317 35 64
Kunal Singh, CFA
Emerging Market Credit Strategist
[email protected]
+41 58 317 31 21
Thilina Hewage, CFA
Emerging Market Credit Strategist
[email protected]
+65 6230 66 61
Cross-Asset Weekly
03 March 2017
Monthly Forecast Update
Dr. Karsten Junius, CFA
Chief Economist
[email protected]
+41 58 317 32 79
Not just a “Trump effect”: cyclical forces strengthen the
outlook for global growth
The outlook for 2017 has brightened, on
the back of the ongoing cyclical upswing
which is not simply a US policy story
Robust data continue to suggest that global growth will continue in 2017. This is a cyclical upswing that, in fact, is global in nature, and whose onset precedes the November US election. As a result, we now anticipate growth at 1.6% in Euroland, 6.4% in
China, and 1.3% in Japan. We add a note of caution about the US: growth will accelerate in 2017, but we have become more cautious about the possibility of a gangbuster
year led by a large fiscal stimulus. As the realities of policymaking in Washington are
becoming apparent, we toned down the impact of tax cuts (which most likely won’t take
effect until early 2018) and government spending as promised by the Trump administration, which is meeting some resistance in Congress. Nonetheless, US growth will
outperform the other Developed Countries in 2017.
As inflation picks up, we now see the Fed
hiking rates in March. Nonetheless some
price pressure is temporary and should
abate by the summer
Along with better growth, we also see a pickup in inflation readings. This is particularly
significant in the US and in the Eurozone, and it is one of the reasons why we now see
the Federal Reserve hiking rates in March, earlier than we previously anticipated (see
“The opportunity for a March rate hike” on page 3). However, the acceleration in inflation in 1Q17 is also driven by temporary factors, such as the base effect created by
weak energy prices at the beginning of 2016. As a result, we see some pressure to
abate in the second half of the year, and it is the reason why we continue to expect two
hikes by the Fed, instead of the three currently priced by the market. Core inflation is
likely to recover modestly in the Eurozone, so we do not see any immediate risk of tapering by the ECB (see page 4).
We revised our growth forecasts upwards for most countries, as we expect a continuation of solid expansion this year. We also revised upward our inflation forecasts, and we now expect the Fed to increase rates in March.
New Macro Forecasts
US
Euroland
Switzerland
UK
Japan
China
GDP
CPI
GDP
CPI
GDP
CPI
GDP
CPI
GDP
CPI
GDP
CPI
2016
1.6
1.3
1.7
0.2
1.3
-0.4
1.8
0.7
1.0
-0.1
6.7
2.1
2017
2.2
2.6
1.6
2.2
1.2
0.3
1.6
2.4
1.3
0.6
6.4
3.0
2018
2.4
2.4
1.7
1.6
1.5
0.5
0.9
2.7
1.2
0.7
6.0
2.5
Source: J. Safra Sarasin, 02.03.2017
2 | Cross-Asset Weekly
Cross-Asset Weekly
03 March 2017
Federal Reserve Preview
Adolfo Laurenti
Global Economist
[email protected]
+41 58 317 30 86
The opportunity for a March rate hike
The Fed is signalling in unified voice its intention to hike rates in March
In recent weeks, the Federal Reserve sent unmistakable signals about its intention to
hike interest rates by a quarter of a percent point at the March Federal Open Market
Committee. The message delivered by Fed officials, for once in one voice, is very clear:
“the case for tightening has become more compelling”; “the Fed should move sooner
rather than later”; and “the case for a rate increase in March has come together.”
A combination of strong indicators, higher
inflation, surging confidence and sanguine
equity markets sealed the case for a hike
This is quite a significant development, considering the caution that still carried the
day at the last FOMC meeting. But economic conditions have evolved in such a way to
create an opening for a March hike. First, surveys of activity and most indicators have
been strong, from ISM manufacturing (see Exhibit 1) to labor markets, and car sales.
Both business and consumer confidence is elevated, and stock markets have surged.
All in all, the economy is in a spot of cyclical strength, and a Fed hike now carries little
risk of a market backlash. Second, inflation is picking up (see Exhibit 2). Despite some
likely easing in the late spring, the Fed sees its long-term objective of 2% inflation within reach. Finally, markets have taken note, and the probability of a March hike shot to
close to 90% in the futures market. At the moment, the decision to hold rate would be
a much greater surprise than the decision to hike.
Some uncertainty about 1Q17 growth and
the prospects for fiscal policy will remain a
concern for the Fed
On the other hand, there might be some reasons to recommend a more cautious approach. In real terms, consumer spending was disappointing in January, and so was
construction; these weak data may create a negative surprise to 1Q growth. Furthermore. some uncertainty persists on the policy front: as expressed in the minute of the
January FOMC meeting, some participants "cautioned against adjusting monetary policy
in anticipation of policy proposals that might not be enacted"; in general, participants
emphasized their uncertainty about changes in fiscal policies and regulations.
The FOMC will not miss the opportunity for
a relatively uncontroversial hike
On net, though, we believe that the combination of strong indicators, higher inflation,
surging confidence and sanguine equity markets have created the opportunity for a fairly uncontroversial hike of a quarter of a percent point, and the FOMC will not miss it.
Strong data, higher inflation, surging confidence and bullish equity markets have
created the conditions for a fairly uncontroversial Fed hike in March.
Exhibit 1: activity indicators show robust activity
Exhibit 2: the pick-up in inflation
3.5
65
yoy percent change in CPI
yoy percent change in core CPI
3
60
2.5
2
55
1.5
1
50
0.5
45
ISM Manufacturing: new orders
0
ISM Manufacturing: overall index
40
2010
2011
2012
2013
2014
2015
2017
Source: Datastream, J. Safra Sarasin, 03.03.2017
3 | Cross-Asset Weekly
-0.5
2012
2013
2014
2015
2016
2017
Source: Datastream, J. Safra Sarasin, 03.03.2017
Cross-Asset Weekly
03 March 2017
ECB Preview
Rising headline inflation does not justify a change in forward guidance at the March meeting
Dr. Karsten Junius, CFA
Chief Economist
[email protected]
+41 58 317 32 79
February inflation rates have surprised on the upside for most euro area countries.
However, higher headline inflation is mainly due to higher prices for energy and
seasonal food. Core inflation will remain well below 1% in the coming months. Additionally, headline inflation will decline from May on towards more moderate levels. Together with political risks and only moderate credit growth we see no reason for changes of the ECB forward guidance on policy rates before June.
While headline inflation increases towards
2% in the coming months, core inflation
will remain below 1% for most of the year
One thing is virtually certain at the ECB-meeting next Thursday: Staff estimates for GDP
and inflation have to be revised upwards. For 2017 and 2018, we expect GDP-forecasts
of 1.8% and 1.7% instead of 1.7% and 1.6%. Headline inflation is likely to be revised
up to 1.7% and 1.6% from 1.3% and 1.5% so far. However, we expect no change in the
forecast of core inflation of 1.1% and 1.4%. Furthermore, we note that the increase of
headline inflation to be transitory. A cold winter in southern Europe led to higher prices
for seasonal food. Together with base effects and higher energy prices this has the potential to increase headline inflation to 2.1% by April. However, thereafter inflation
rates will decline towards 1.6-1.8% for the rest of the year and core inflation is unlikely
to increase beyond 1% before November. With this pattern in mind, in our view it would
be too early to see inflation rates on a self-sustained path towards the inflation target.
Cyclical forces gain strength but a number
of mainly political and financial market
risks persist
Survey indicators confirm that the euro area as well as the global economy is enjoying
a strong and synchronized upswing. The euro area is still fragile as political risks might
lead to stronger risk aversion in the coming months, while the debt overhang is still
weighting on credit growth. As Exhibit 2 shows, most loan aggregates increase only
slightly – even overall credit growth to euro area residents, which includes credit to
governments that grew at 10.5% yoy lately. While we expect the ECB to rephrase its
risk assessment we believe that it will still be tilted (slightly) to the downside.
June would be the appropriate meeting to
change the forward guidance for key policy
rates
Overall, we consider it too early for the ECB to change its policy stance at next week’s
meeting. Instead, we expect the Governing Council to change the forward guidance at
the June meeting by dropping the reference to lower key rates. This can be followed in
September by the announcement of a further reduction of asset purchases in 2018.
Exhibit 1: Purchasing Manager Indices point towards strong
growth in Q1 in all major euro area countries
65
3
2.5
60
2
55
1.5
50
1
0.5
45
EMU GDP in% yoy
France PMI
Germany PMI
Spain PMI
Italy PMI
40
35
30
Q1 2010
Q1 2012
Q1 2014
0
-0.5
-1
-1.5
Q1 2016
Source: Datastream, J. Safra Sarasin, 01.03.2017
4 | Cross-Asset Weekly
Exhibit 2: Monetary aggregates are still reflection slow recovery
from debt overhang
8
6
4
2
0
-2
-4
-6
-8
-10
Q1 2010
M3 in % yoy
Loans to households in % yoy
Credit growth to euro area residents in % yoy
Loans to non-financial corporates in % yoy
Mortgage loans to households in % yoy
Q1 2012
Q1 2014
Q1 2016
Source: Datastream, J. Safra Sarasin, 01.03.2017
Cross-Asset Weekly
03 March 2017
Global Rates and FX
Bond yields to continue rising in Q2
Dr. Florian Weber, CFA
Fixed Income Strategist
[email protected]
+41 58 317 31 14
We believe the trend to higher bond yields should resume in Q2, in particular in
Europe. We revise our forecasts for Q2 in Germany and Switzerland slightly downwards but remain significantly more bearish than the market. In the US, the market pricing has converged to our forecasts.
Bond yields should continue to rise globally
We expect the trend to higher bond yields to continue in the second quarter (see Exhibit 1). In particular, we believe the strong political risk premium that has been supporting 10-year bonds in Germany, the UK and Switzerland should fade. This would allow
these bonds to increase again. While we see stronger rising bond yields in Europe, we
believe 10-year US treasury yields should only increase slightly. This means the spread
between 10-year US treasuries and equivalent maturity German Bunds should fall.
Higher US yields is already priced by the
market
In the US, we continue to see the biggest increase from the current spot rates in the
front-end of the US yield curve. However, the repricing since Tuesday means that the
market implied forwards have converged closely towards our own forecasts, and therefore, being short is less compelling.
We expect 10-year UK gilts yields to raise
more than priced by the market
In the UK, we expect the Bank of England to remain on hold during the remainder of
2017. However, the increasing inflation rates should feed into a steeper yield curve.
We expect 10-year UK gilt yields to reach 1.5% by the end of Q2.
In Germany and Switzerland, 10-year yields
should increase again in Q2
In Germany and Switzerland, we expect the yield curves to resume their steepening
trends. We see 10-year German Bund yields rise to 0.5% and 10-year Swiss government bond yields rise to 0%. Our forecasts are 11bp and 14bp respectively above the
market implied forward yields. However, ahead of the French elections we see risks for
setbacks in the trend to higher yields. Combined with the low interest rate differential
between Swiss and German 2-year rates, we expect the SNB to maintain its currency
interventions. From the SNB’s perspective, the negative side effect of the currency interventions is that it lowers the differential between Swiss and German bond in the
front-end of the yield curve.
Exhibit 1: 10-year bond yields are expected to continue rising in
Q2
Exhibit 2: Our forecasts for individual yield curve points against
the market implied forward rates.
Key Policy Rates
End of Q2
28-Feb-17
0.75
-0.40
-0.75
0.25
-0.04
Jun-17
1.00
-0.40
-1.00
0.25
-0.10
Sep-17
1.25
-0.40
-1.00
0.25
-0.10
Dec-17
1.25
-0.40
-1.00
0.25
-0.10
Bond Yields (10yr benchmark)
28-Feb-17
USA
2.36
Germany
0.21
Switzerland
-0.21
UK
1.07
Japan
0.05
Jun-17
2.55
0.50
0.00
1.50
0.05
Sep-17
2.75
0.75
0.25
1.75
0.05
Dec-17
3.00
1.00
0.45
2.00
0.05
US Fed Funds
EUR depo rate
CH 3m LIBOR target
BoE base rate
JP O/N call rate
Source: J. Safra Sarasin, 02.03.2017
5 | Cross-Asset Weekly
2y
5y
10y
2y
Germany 5y
10y
2y
UK
5y
10y
2y
CHF 5y
10y
US
Spot
1.30%
2.01%
2.48%
-0.86%
-0.50%
0.30%
0.09%
0.49%
1.18%
-1.02%
-0.73%
-0.23%
Forecast
1.55%
2.20%
2.55%
-0.85%
-0.45%
0.50%
0.10%
0.65%
1.50%
-1.10%
-0.70%
0.00%
Forward
1.53%
2.17%
2.57%
-0.80%
-0.41%
0.39%
0.12%
0.62%
1.24%
-1.05%
-0.67%
-0.14%
ForwardSpot
25bp
19bp
7bp
1bp
5bp
20bp
1bp
16bp
32bp
-8bp
3bp
23bp
ForecastSpot
23bp
16bp
10bp
6bp
9bp
9bp
3bp
13bp
6bp
-4bp
6bp
9bp
ForecastForeward
2bp
3bp
-2bp
-5bp
-4bp
11bp
-2bp
3bp
26bp
-5bp
-3bp
14bp
Source: J. Safra Sarasin, 02.03.2017
Cross-Asset Weekly
03 March 2017
Excurse: Details of the SNB’s FX reserves
Following up our “Safe havens move against the tide” – Cross Asset Weekly, 24-Feb2017, we want to update SNB’s data about the currency and rating of its FX reserves. From a currency perspective, EUR investments represent the largest share
with 44% of the total currency reserves (see Exhibit 3). The USD has the second
largest share with 33%. The SNB’s FX reserves are mainly held in fixed income investments (80%) – mainly sovereign bonds. The largest part of its bond portfolio has
AAA rating (see Exhibit 3). In Europe, only German and Dutch bonds would fall into
this category. This means most likely the 61% AAA holding are comprised of German
Bunds and US treasuries. The second largest bucket contains bonds with AA rating.
We believe this comprises mainly of French and British government bond yields. The
duration of the fixed income was 4.2 at the end of Q4 2016. This indicates the SNB
is mainly buying bonds in the shorter part of the yield curve. The SNB also mainly
been buying EUR and to a lesser degree USD over the last year. From a rating perspective, the SNB focussed on AAA and AA rated bonds. However, we doubt the SNB
is currently buying French bonds.
Exhibit 3: Currency breakdown of the SNB’s
3% 6%
7%
USD
33%
7%
Exhibit 4: Rating breakdown of the SNB’s currency interventions
9%
5%
EUR
AAA
AA
JPY
25%
GBP
A
61%
CAD
44%
Other
Other
Source: Swiss National Bank, J. Safra Sarasin, 02.03.2017
2-year German and Swiss bond yields are
supported by the SNB’s intervention and
the potential for a rate cut
Source: Swiss National Bank, J. Safra Sarasin, 02.03.2017
This means in Europe it most likely focusses on German bonds in the front-end. This
would support short dated German Bunds, and therefore, we believe 2-year German
Bund yields will remain almost unchanged from current level. In order to reduce the
pressure on the Swiss Franc and restore some of interest rate differential, we continue
expecting another rate cut by the SNB, which would be supportive of 2-year Swiss
rates. We forecast 2-year Swiss rates to fall to negative 1.1%.
FX-Forecasts
EUR - CHF
EUR - USD
EUR - GBP
GBP - USD
USD - JPY
USD - CHF
USD - CNY
28-Feb-17
1.07
1.06
0.86
1.24
112.8
1.01
6.87
Jun-17
1.05
1.02
0.87
1.17
116
1.03
7.00
Sep-17
1.04
1.01
0.87
1.16
118
1.03
7.05
Dec-17
1.03
1.00
0.87
1.15
120
1.03
7.10
Source: J. Safra Sarasin, 02.03.2017
6 | Cross-Asset Weekly
Cross-Asset Weekly
03 March 2017
Swiss Macro
Ursina Kubli
Forex Strategist
[email protected]
+41 58 317 32 80
Swiss 4Q16 GDP falls short of expectations on exports
Weak 4Q16 GDP growth figures don’t
match the strong Swiss PMI and KOF
Swiss 4Q16 GDP growth fell well short of expectations, growing +0.1% qoq. Swiss GDP
had already disappointed by growing a meagre +0.1% qoq in 3Q16. Annual GDP growth
in 2016 reached 1.3%, well below GDP growth of 1.7% in the euro area. The weak economic growth rates in 2H16 are also in stark contrast to the high level of the KOF index
and the Swiss PMI manufacturing.
Export goods fell by 3.8% in 4Q16, the
weakest quarterly result in three years.
Merchanting has been hit by higher commodity prices
The main reasons for the weak 4Q16 GDP figures were disappointing exports numbers
and a slight retreat in investment in construction and equipment. Exports goods have
declined by 3.8% in 4Q16, the weakest quarterly result in three years. After the positive export numbers released by the Federal Customs Administration from October to
December, the strong retreat in export activity in 4Q16 has been a surprise. The discrepancy of the export data in the SECO GDP release and the trade data by the Federal
Customs Administration highlights the different collection methods. One of the key differences is that the SECO export data include also merchanting. Merchanting is playing
a significant role for the Swiss economy, making more than 4% of Swiss GDP. Rising
commodity prices had a negative impact on real merchanting figures, dampening export
data in the GDP readings.
Weak GDP growth is in stark contrast to the high level of economic indicators. As
of 2017, we remain more cautious than consensus, forecasting Swiss GDP growth
at 1.2%. If our expectations of below-potential growth rates materialize, the SNB
will have incentives to step up its measures, dampening the upside pressures on
the Swiss franc. We project the SNB to cut rates by 25bps in 1H17.
Exhibit 1: Strong disconnect between economic leading indicators
and real activity data
Exhibit 2: Export growth in 2016 compared to 2015: Strong export activity is mainly driven by the pharma industry
5
80
Watches
4
70
Paper and graphic products
60
Precision instruments
50
Food, beverages and tobacco
40
Machines and electronics
30
Plastics
3
2
1
0
-1
-2
Swiss GDP growth % yoy
-3
Swiss PMI manuf. 3m avg.
Metals
20
Textiles, closhing, shoes
10
Chemical and pharmaceutical products
0
-4
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: J. Safra Sarasin, 02.03.2017
Annual export activity has been strong in
2016, mainly driven by the pharma industry
7 | Cross-Asset Weekly
-15
-10
-5
0
5
10
15
20
Source: J. Safra Sarasin, 02.03.2017
Yet, looking at the entire year 2016, export data were robust, rising by +4.6%. Considering the high valuation of the Swiss franc, the strong export activity in 2016 is remarkable. This raises the question whether the Swiss economy could also cope with a
stronger currency, which would have important implications for the future SNB monetary
policy instruments. Looking at the details of the export data, decent growth in export
activity has been mainly driven by the pharma industry. However, other sectors, clearly
felt the headwinds from the strong Swiss franc.
Cross-Asset Weekly
03 March 2017
It remains to be seen, whether pharma exports can continue to grow at the same
speed
Pharma exports are not very sensitive to the value of the Swiss franc because high
margins and the lack of close substitutes give the pharma companies high pricing power. Additionally, export activity in the sector has been supported by the decisions to
transfer more production to Switzerland in the last years. Novartis, for example, invested CHF 500mn in a new production facility in Stein (AG). Going forward, it remains to
be seen whether more Swiss production will be a structural trend in the pharma industry. Cross-border taxes in the US or the lack of a sensible corporate tax reform in Switzerland could dampen the outlook for Swiss locations.
Our 2017 GDP growth forecasts of 1.2%
remain unchanged. We remain more cautious than consensus
As of 2017 we have left our annual GDP growth forecasts unchanged at 1.2%. The
negative effect of weak Swiss GDP growth in 2H16 is offset by the better growth environment in Europe (we have revised up our GDP growth forecasts in the euro area from
1.5% to 1.6%). Compared to the consensus, which projects 2017 GDP growth at 1.5%,
we are more cautious. If our expectations of below-potential growth rates materialize,
the SNB will have the incentive to step up its measures against the strong demand for
the Swiss franc. We project the SNB to cut rates by 25bps in 1H17, dampening the upside pressures on the Swiss franc.
8 | Cross-Asset Weekly
Cross-Asset Weekly
03 March 2017
Global Equity Strategy
The music is still playing, when it stops, buy the pullback
Cédric Spahr, CFA
Equity Strategist
[email protected]
+41 58 317 31 28
A steady flow of good news underpins the uptrend in global equity markets which
should last till the end of 1H17. We adjusted our year-end targets for the Nasdaq
100 and MSCI EM indices to account for improving earnings trends. Several equity
indices have potential to move higher in March. Sentiment is starting to look
somewhat ebullient as retail investors join the fray. A mild correction in 2Q17
would cool off overheated short-term sentiment. A repricing of French election risk
and economic policy delays in the US would represent a buying opportunity.
The stock market honeymoon is not over,
even if sentiment is turning ebullient
How long is the honeymoon between equity markets and investors going to last? Probably longer than many investors think, though there are some valid caveats due to
somewhat frothy short-term sentiment readings. A well-received State of the Union address by Trump, hints by Federal Reserve governors of an advanced rate hike — we expect the Fed’s next rate hike on 15 March — as well as solid readings for the ISM
manufacturing index unleashed a buying frenzy in US and European equities. The rapidly rising election odds of Emmanuel Macron furthermore buoyed equity markets in
France and across the euro area, as the risk of Frexit took the back seat (see chart).
Cyclical sectors like financials, materials
and industrials gain traction
Economic news is undeniably positive, short-term sentiment is turning frothy and retail
investors have started to jump on the bandwagon of rising US equity markets. Several
key equity sectors such as banks, insurance, materials and industrials moved higher.
The current upward trend appears likely to keep accelerating to the upside in March
and should probably exhaust itself and usher in a mild correction in the middle of
2Q17 which should provide an attractive entry point. The most obvious fundamental
reason for a period of retrenchment would be a repricing of political risk between the
first and the second round of the French presidential election if the odds of a victory
of Ms. Le Pen improve between 23 April and 7 May. Her first round result might be
stronger than presently anticipated and stir some concerns among investors (please refer for more details to our French election guide “French elections carry high stakes”
from 17 February 2017). The Trump administration might disappoint in 2Q17 on the reform side. President Trump publicly admitted that reforming the US healthcare system
was very complicated. Since House Republicans strive to prevent a return of runaway
budget deficits, they are unlikely to enact a corporate tax reform without visibility over
the budgetary impact of a reform of Obamacare.
Exhibit 1: French equities rally as political risk declines
Exhibit 2: Solid manufacturing surveys fuel earnings revisions
60
5'000
80
60
40
70
20
50
4'900
60
4'800
40
4'700
30
0
50
-20
-40
40
4'600
20 Jan 2017
CAC 40
Election odds Macron (rhs)
Election odds Le Pen (rhs)
04 Feb 2017
ISM new orders
-80
Net S&P 500 earnings revisions (rhs)
20
19 Feb 2017
Source: Datastream, J. Safra Sarasin, 03.03.2017
9 | Cross-Asset Weekly
-60
30
20
1990
-100
1995
2000
2005
2010
2015
Source: Datastream, J. Safra Sarasin, 03.03.2017
Cross-Asset Weekly
03 March 2017
European equity indices have potential to
overshoot in March
Several stock indices are likely to overshoot our year-end targets in coming weeks. The
German DAX should clear 12000 and target a retest of 12400, which was its 2015
high. The Euro Stoxx 50 has now potential to revisit 3520 points, a level last reached
in December 2015. The S&P 500 needs to clear a technical hurdle at 2’410 to reach
2460 where we would expect a possible intermediate top. This would also coincide with
our year-end target of 2450 points. Strength in the pharma and financial sectors should
lift Swiss equities in the short-term. The SMI looks poised to challenge important levels
at 8770 points. We maintain our year-end target at 8500 waiting for better earnings
visibility.
Robust environment for global equities till
mid-year
The strong improvement in business conditions and expectations across the globe
should persist and foster a positive environment for global equity markets till the end
of 1H17. The ISM new orders index suggests that the current business cycle has further to run. Since manufacturing surveys and earnings revisions move in lockstep, positive earnings revisions should last at least into mid-year. We increased our year-end
target for the Nasdaq 100 from 5’300 to 5’400 and for the MSCI Emerging Markets
index from 950 to 975 to account for firming earnings trends. We conversely took our
year-end target for the Nikkei 225 down from 21000 to 20500 to reflect a more bullish
stance on the yen, which would erode the profitability of Japanese companies.
Exhibit 3: Short-term sentiment is elevated and could spike to the
upside for US equities by late March
Exhibit 4: Consistently strong Ifo readings fuel DAX advances
2400
14'000
100
S&P 500
120
DAX
German Ifo index (rhs)
Short-term sentiment indicator (rhs)
80
2200
11'000
110
8'000
100
5'000
90
60
2000
40
1800
1600
2014
20
0
2015
2016
2017
2'000
2000
Source: Bloomberg, J. Safra Sarasin, 03.03.2017
80
2005
2010
2015
Source: Datastream, J. Safra Sarasin, 03.03.2017
Stock index forecasts
USA
S&P 500
Nasdaq 100
02.03.2017
2'396
5'391
P/E ratio
20.3
25.7
Dec 17
2'450
5'400
Dec 18
2'500
5'700
Europe
FTSE 100
DJ Euro Stoxx 50
DAX
SMI
SPI
SMIM (Mid-Caps)
7'383
3'390
12'067
8'635
9'457
2'138
17.8
16.1
15.5
18.4
19.2
19.8
7'500
3'350
12'000
8'500
9'400
2'100
8'000
3'450
12'500
8'800
9'700
2'150
Japan
Nikkei 225
19'394
16.7
20'500
22'000
938
14.4
975
1'050
Emerging Markets
MSCI EM
Source: Datastream, J. Safra Sarasin, 03.03.2017
10 | Cross-Asset Weekly
Cross-Asset Weekly
03 March 2017
Emerging Market: Asia High Yield Bonds
Thilina Hewage, CFA
Emerging Market Credit Strategist
[email protected]
+65 6230 6661
Expect the rally to take a breather
Asia HY bonds have outperformed the IG
sector since 2016
Asia High Yield (HY) bonds started 2017 on a strong note, gaining 3.1% in the first two
months of the year. The performance so far in 2017 looks particularly impressive, extending the sector’s 11% return in 2016. Asian HY bonds have outperformed the Investment Grade (IG) sector by 8% since the beginning of 2016 (Exhibit 1). The
stretched valuation levels and elevated new issue supply are two key limitations for the
Asian HY sector to maintain its stellar performance in the near term.
The spread pick-up of the Asian HY sector
doesn’t compensate for the risk
The Asian HY sector presently offers 260bps of yield pickup over Asian IG bonds, the
lowest level since mid-2013. While the spread gap between HY and IG has seen lows
of 150bps in 2012, we note that credit quality of HY sector has worsened over the last
four years. The average rating of the HY sector has declined to B+ from BB in 2012.
The IG sector, on the other hand, has maintained its average rating of A-. In our view,
the current spread pick up doesn’t sufficiently compensate investors for the incremental credit risks associated with the HY sector. Furthermore, the Asian HY sector trades
20bps inside US HY (B+ index) bonds which is not justified given the idiosyncratic corporate governance risks of Asian HY issuers.
Higher supply level is another impediment
to further spread tightening in HY
Asian HY issuers have issued $9.9bn of bonds in 2017, compared to $2.8bn in the
same period in 2016. This year, we expect higher levels of issuance from Chinese HY
names in international markets due to tighter regulations in the onshore bond market
in China. The elevated supply level could adversely impact the technical support for
Asia HY bonds.
We retain our preference towards IG
Overall, tight valuation levels and higher new issue supply may affect the performance
of the Asian HY sector in the near term. In the current environment, we retain our preference towards higher quality IG sectors within the Asian credit market.
Tight valuation levels and elevated new issue supply could hinder the performance
of the Asia High Yield sector in the near term. In the current environment, we continue to prefer higher quality Asian IG bonds
Exhibit 1: Total Return in Asia HY and Asia IG bonds
Exhibit 2: Spread Pick-up in Asia HY over Asia IG
116
450
Asia High Yield
400
112
Asia Investment Grade
350
108
300
250
104
200
100
96
Jan-16
150
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Source: JP Morgan, Bloomberg, BJSS
`
11 | Cross-Asset Weekly
100
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Source: JP Morgan, Bloomberg, BJSS
Cross-Asset Weekly
03 March 2017
Economic Calendar
Week of 06/03 – 10/03/2017
Country Time
Item
Date
Unit
Consensus
Forecast Prev.
Monday, 06.03.2017
CH
10:00 Total Sight Deposits
10:00 Domestic Sight Deposits
EMU
10:30 Investor Confidence
US
16:00 Factory Orders
Mar 3 CHF bn
Mar 3 CHF bn
Mar
index
Jan
mom
- 548.2
- 470.2
- 17.4
+0.9% +1.3%
Tuesday, 07.03.2017
EMU
11:00 GDP, final
11:00 GDP, final
DE
08:00 Factory Orders
US
21:00 Consumer Credit
4Q16
4Q16
Jan
Jan
20.00
Wednesday, 08.03.2017
CN
00:00 Imports
00:00 Exports
CH
09:15 CPI Harmonized
09:15 CPI Harmonized
US
14:30 Nonfarm Productivity, final
16:00 Wholesale Inventories, final
Feb
Feb
Feb
Feb
4Q16
Jan
qoq
yoy
mom
USD bn
yoy
yoy
mom
yoy
qoq
mom
+12.9%
+8.6%
+1.5%
-
+0.4%
+1.7%
+5.2%
14.16
+25.2%
+15.9%
-0.2%
+0.3%
+1.3%
-0.1%
Thursday, 09.03.2017
CN
02:30 PPI
CH
07:45 Unemployment Rate, sa
US
14:30 Import Price Index
14:30 Import Price Index
15:45 Consumer Comfort
Feb
Feb
Feb
Feb
Mar 5
yoy
%
mom
yoy
index
+7.4%
+0.1%
-
Friday, 10.03.2017
CN
00:00 M1 Money Supply
00:00 New Yuan Loans
DE
08:00 Exports
US
14:30 Change in Nonfarm Payrolls
14:30 Change in Manufact. Payrolls
14:30 Unemployment Rate
14:30 Avg. Hourly Earnings
14:30 Avg. Hourly Earnings
14:30 Avg. Weekly Hours
20:00 Monthly Budget Statement
Feb
Feb
Jan
Feb
Feb
Feb
Feb
Feb
Feb
Feb
yoy
CNY bn
mom
1 000
1 000
%
mom
yoy
h
USD bn
-+14.5%
-2030.0
- -3.3%
175
227
8
5
4.7% 4.8%
+0.2% +0.1%
- +2.5%
34.4 34.4
- 51.3
+6.9%
+3.3%
+0.4%
+3.7%
-
Source: Bloomberg, J. Safra Sarasin
12 | Cross-Asset Weekly
Cross-Asset Weekly
03 March 2017
Contacts
Dr. Karsten Junius, CFA
Chief Economist
[email protected]
+41 58 317 32 79
Adolfo Laurenti
Global Economist
[email protected]
+41 58 317 30 86
Ursina Kubli
Forex Strategist
[email protected]
+41 58 317 32 80
Cédric Spahr, CFA
Equity Strategist
[email protected]
+41 58 317 31 28
Dr. Florian Weber, CFA
Fixed Income Strategist
[email protected]
+41 58 317 31 14
Emiliano Surballe, CFA
Emerging Market Credit Strategist
[email protected]
+41 58 317 35 64
Kunal Singh, CFA
Emerging Market Credit Strategist
[email protected]
+41 58 317 31 21
Thilina Hewage, CFA
Emerging Market Credit Strategist
[email protected]
+65 6230 66 61
Market Performance
Global Markets in Local Currencies
Government Bonds
Swiss Eidgenosse 10 year (%)
German Bund 10 year (%)
UK Gilt 10 year (%)
US Treasury 10 year (%)
French OAT - Bund, spread (bp)
Italian BTP - Bund, spread (bp)
Current value
Δ 1W
Δ YTD
TR YTD in %
-0.14
0.34
1.20
2.50
59
177
7
16
12
19
-16
-24
4
13
-4
6
11
16
0.4
-0.2
1.0
0.0
Spread over
govt bonds
Credit Markets (bp)
US Investment grade corp. bonds
EU Investment grade corp. bonds
US High yield bonds
EU High yield bonds
Stock Markets
60
69
307
275
Change in credit spread
Credit index
Δ 1W
Δ YTD
TR YTD in %
2
6
11
21
7
3
47
13
0.7
0.0
3.3
1.7
Level
P/E ratio
1W TR in %
TR YTD in %
8'652
12'033
19'571
9'737
3'392
7'368
2'382
5'363
19'469
936
17.5
13.9
13.4
13.9
14.5
14.9
18.4
20.2
18.4
12.6
1.8
0.9
3.3
2.3
1.5
1.6
0.8
0.6
1.1
-1.6
6.1
5.0
1.3
4.5
3.2
4.2
6.8
10.5
2.4
8.7
Forex - Crossrates
Level
3M implied
volatility
1W in %
YTD in %
USD-CHF
EUR-CHF
GBP-CHF
EUR-USD
GBP-USD
USD-JPY
EUR-GBP
EUR-SEK
EUR-NOK
1.01
1.07
1.24
1.05
1.22
114.5
0.86
9.53
8.93
7.9
7.0
8.6
9.8
9.5
11.3
10.2
6.8
7.3
0.4
0.2
-1.5
-0.2
-1.9
2.1
1.7
-0.2
0.9
-0.7
-0.5
-1.7
0.2
-0.9
-2.1
1.0
-0.5
-1.7
SMI - Switzerland
DAX - Germany
MIB - Italy
IBEX - Spain
DJ Euro Stoxx 50 - Eurozone
FTSE 100 - UK
S&P 500 - USA
Nasdaq 100 - USA
Nikkei 225 - Japan
MSCI Emerging Markets
Commodities
Level
3M realised
volatility
1W in %
YTD in %
CRB Commodity Index
Brent crude oil - USD / barrel
Gold bullion - USD / Troy ounce
434
55
1'228
5.2
19.0
10.6
5.0
-1.8
-2.3
2.6
-1.6
7.0
Source: J. Safra Sarasin, Bloomberg
13 | Cross-Asset Weekly
Cross-Asset Weekly
03 March 2017
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Cross-Asset Weekly
03 March 2017
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