La tentation du risk-on… Les marchés actions ont continué de bien se comporter tout comme les obligations émergentes et corporate. Quelques bonnes nouvelles et certains investisseurs pourraient être tentés d’accroître davantage encore leur exposition aux actifs risqués. Pas si vite, clament les stratégistes de JPMorgan emmenés par Jan Loeys.
« Equities surged and bonds fell this week with our preferred mid-risk assets of credit and defensive stocks being caught in the middle, doing very little this week. Should we join in? There is no smoke without some fire. Some data points suggest a bottom is forming in economic growth, while last week’s ECB announcement of a new SMP is being interpreted as a strong step forward. We suspect that much of this week’s market moves is position squaring, but all major reversals tend to start this way. At issue is whether position covering will move on to active position taking on reduced risks to global growth & the euro crisis.
Our conclusion at this point is that while the recent market moves are tempting, and there are some tantalizing signs of a bottom in global economic growth, they are not enough to make us switch wholesale into a full risk-on stance. We thus continue to concentrate on mid-risk assets — higher-yielding spread product and higher-yielding equities — between the safest bonds and cash, and the riskiest stocks. But we do tip our head to these tantalizing signs by again adding a touch more risk. Last week, in GMOS, we switched part of our HG overweight vs cash into HY and EM external debt. This week, we add Value stocks in Europe which do have a higher beta (see below under equities).
What are these tantalizing sign? First on the economic side, US data have decidedly improved. Last week’s upwards surprise on Payrolls was joined this week by another decline in weekly claims, a nice jump in June exports, and a drop in June inventories. No economic boom coming here, but we can at least scratch the downward risk bias we have been signaling on Q3. Watch next week’s release of July retail sales, which we think will show a rebound.
On the other side of the world, we received a barrage of Chinese economic data that were not as good as we had hoped, but still appear consistent with a pickup from Q2. Much of the monetary and fiscal easing in China that we rely on for a full percentage point rise in the growth pace should start showing up only from August data on. At the same time, the reports do not yet threaten our assumption of weak demand for metals and our underweight of base metals versus energy (see commodities below).
The rest of the world has been showing much weaker data this week although they almost all relate to June. They do signal downside risks around our H2 forecasts for Japan, India, Brazil and Russia (see GDW). They keep us with an underweight of the so-called BRIC countries within EM equities.
Europe has been quiet this week from a markets’ point of view, largely as governments typically do not issue debt in August with many decision makers on vacation. The data were close to expectations, even a touch weaker in Germany. We expect that the German economy is now close to zero growth, bringing home some of the pain of the rest of EMU and thus hopefully focusing the mind more on the urgent need to end the crisis. Political noise around last week’s ECB announcement that it is ready for a new approach to support governments with funding problems has been largely positive, even in Germany. Spain and Italy are under no immediate pressure to apply for aid and the ECB can thus quietly develop its new approach which it will likely unveil at its next meeting on Sep 6. No news is good news at the moment and thus a mild, if only temporary support for risk markets, in our view.
Market activity is medium-term positive for risk markets. We have seen significant covering of longs/overweights in bonds and shorts/underweights in equities by both real and leveraged money. If anything, real (long-only) managers seem to be acting faster. Shortterm technical support for risk market is admittedly weakening, as there are fewer shorts, but the stronger medium-term momentum, depicted on the chart on p. 1, should provide support for risk markets. »