Global Weekly: Equities bouncing back

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Stock markets recovered further this week as investors shrugged off fears of the impact of rising interest rates on stocks. In addition, company earnings were generally strong. The S&P 500 Index gained some 3%, but the gains were largely wiped out for European investor as the US dollar weakened again.

European stocks rose by some 3%, while Japanese shares were largely flat. From a sector perspective, IT, financials and consumer discretionary gained most for the week, while more defensive sectors like telecom, utilities and real estate lagged. 

The fourth-quarter earnings season is in full progress now. There were notably strong results from Airbus and Under Armour. Airbus rose by around 10% on Thursday after reporting a solid order book and bullish forecasts for 2018. That gave comfort to investors, who were concerned that engine durability issues of the A320neo plane would hurt production in 2018. Athletic wear player Under Armour gained 20% as the company reported a sales increase of almost 50% for its overseas activities, which could be an indication that its new product line is paying off. Moreover, advertising agencies like Publicis and WPP gained on positive results from their American counterpart Interpublic.

In Europe, some 50% of companies have now reported their earnings. So far, results are showing a mixed picture. Just over 50% of earnings surprised positively, with good results in consumer discretionary and commodity-related sectors being offset by misses in telecoms and real estate. In the US, some 80% of earnings beat expectations with particular strength in the IT, consumer discretionary and materials sectors.

Bonds: interest rates continue to rise

Global interest rates have resumed their upward trajectory as US inflation figures surprised on the upside this week, and a Merkel-led government in Germany is only one step away. Investors fear higher inflation as it impacts corporate profits. Rising inflation could also represent a signal that the economy is closer to overheating than previously thought. Overheating could occur if US tax reforms would provide a boost to the economy. Markets will be eyeballing the reaction of the Fed. As a rate hike in March seems certain, investors will focus on how Fed policymakers will put all of this in perspective. Maybe Fed Chair Powell will shed some light on this shortly. In the eurozone, discussions amongst investors seem to be shifting from the end of asset purchases in 2018 to ECB rate hikes in 2019, signalling that positive economic momentum is being extrapolated.

Compared to this month’s equity losses, corporate bonds remained rather resilient. US high-yield bonds suffered. However, considering that this asset class is heavily owned by retail investors, the rise of 30 basis points in risk premia pales with the drop in equity prices. It also signals that retail investors are not worried yet. Given the current economic momentum, we do not think default expectations will move much higher anytime soon. For now, we stick to our credit allocations. In the eurozone, corporate bonds are still heavily supported by the ECB’s asset purchase programme. Although the ECB recently tapered its total asset purchases to EUR 30 billion a month, it did not scale back its corporate bond purchases.

This week, the Belgian government announced it will issue EUR 10 billion in green bonds over the next 4 to 5 years, becoming Europe’s third sovereign issuer of environmentally friendly debt.

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