All eyes were on central banks this week, as central bankers in both the US and Europe gathered for important policy meetings. In the US, the Federal Reserve announced a rate hike – the second for this year, stating that the current labour environment had improved and reached satisfying levels, while core inflation was now slightly above the 2% objective.
Didier Duret, global chief investment officer at ABN Amro Private Banking, speaks about developments in the European telecoms sector.
It has been a positive week for equities. Asian indices rose most, followed by the US. Minor gains were recorded in Europe. In line with this positive momentum, most sectors managed to rise, except for the utilities and energy sectors. The strongest sectors were materials and consumer discretionary.
Italian politics sparked market turbulence this week. After President Mattarella vetoed on the appointment of euro-sceptical Paolo Savona as minister of finance, markets were in disarray. Later, parties have proposed a new minister of finance and a new government can be established.
Political woes in Italy caused a sharp market reaction in recent days. Although the situation in Italy is a reason for concern, we do not believe another chapter of the euro crisis is unfolding.
Didier Duret, global chief investment officer at ABN Amro Private Banking, discusses a potential European banking union and Italy’s politicial situation.
Bond markets continue to be driven by political risks arising from Italy, where the new government is being established by Lega and the 5 Star Movement. The two parties’ massive fiscal spending plan of around 6% of GDP will put pressure on the country’s long-term creditworthiness. Fortunately, the idea of a EUR 250 billion debt relief, which has been proclaimed within an unofficial and leaked draft, did not make it into the final agreement between the parties.
Economic growth across the globe continues to be strong, central bank policies remain supportive and company fundamentals are solid. Despite the positive features of the investment environment, it is admittedly less rosy than last year. But it has likely shifted only from great to good.
This week, Jamie Dimon, CEO of JPMorgan, advised investors to prepare for 4% yield levels in the US. At the time of writing, the 10-year US Treasury yield is hovering around 3%. Although we see room for further yield increases as well, 4% seems too far-fetched. We expect the US 10-year yield to be at 3.2% at the end of this year.
Over the past week, equity market performance has been mixed. Although first-quarter earnings are generally encouraging and, for the moment, geopolitical tensions with regards to trade tariffs and the Middle East have moved to the background, the MSCI World Index traded sideways. At the same time, European equity markets have been outperforming the US, which might be counterintuitive when looking at the earnings season’s results.
The US economy seems to have picked up pace again at the start of the second quarter. An acceleration in new order growth indicates strong demand for goods and services. Additionally, a surge in input price inflation – resulting from the tariff introduction which had been a key factor pushing raw material costs higher – is sending hawkish signals to policy makers.
US treasuries continued to move in their trading range, set since February, and there are currently no signs that the 10-year US Treasuries might break through the 3.0% yield level. Also in Europe, we saw core government bonds from Germany, France and the Netherlands moving in a trading range, and outperformance for European peripheral bonds from countries such as Italy, Spain and Portugal.
Strong economic growth in the developed countries and most emerging markets, high consumer confidence and strong business sentiment indicators have set a good framework for the first-quarter earnings season that just kicked off. What are we looking for as the earnings season unfolds?
While there have been a series of dramatic headlines over the past month, regarding trade war fears, US political scandals, declines in tech stocks and heightened tensions in Syria, actual economic and company fundamentals remain solid.
Stock markets were calm this week, with stocks in the US and Europe rising slightly compared with last week. Investors have become less concerned about an escalating trade war between the US and China, following comments by the Chinese President Xi Jinping about opening the Chinese economy and reducing tariffs on imported cars. The possibility of a US military strike on targets in Syria did not worry investors too much. The oil price, however, did react and rose some 5%.
Given nervous equity markets and a decline in leading indicators, especially in Europe, German Bunds and US Treasuries continued to be used as safe havens this week. Ten-year Bund yields are back to 0.5%. This is at the top of the range in which they traded for most of 2017. We expect that leading indicators will turn more positive again, after adjusting to more sustainable levels.
This week started with declining stocks prices, as risks linked to taxation and regulation have triggered profit taking on the IT sector, in particular on Alphabet, Amazon and Facebook.
The ABN AMRO Investment Committee retains its positive outlook for economic growth, muted inflation and a gradual approach by central banks to more normal (higher) interest rates.
Equity markets had a tough week and lost 3-4%. A number of events grabbed investor attention, ranging from the (data) crisis around Facebook, to the Federal Reserve's latest meeting with the new Fed Chair Jerome Powell and additional announcements on US trade tariffs.
In our Investment Outlook, published in December, our Chief Economist Han de Jong described the investment environment of 2017 as “nothing short of incredible.” It was a year expected to be a solid basis for economic activity in 2018.
