The rebound in financial markets reflects strong optimism among market participants that real and nominal economic growth and inflation are about to get stronger in the coming years. This view has supported a sharp rebound in valuation ratios (see chart above). At the same time, USD has continued appreciating against most currencies, and the fixed income market has consolidated on the back of rising yields. Lire la suite
Question: how long will this hold ?
After the recent rally in stocks, a note of caution from BofAML strategist Michael Hartnett and team. Since it’s difficult to sum it up, here are the key points made by them : Lire la suite
One of the latest publication on X-asset strategy comes from Morgan Stanley and the message is pretty grim:
« Our cycle indicators across DM have stalled, pointing to rising risks of a shift from ‘expansion’ to ‘downturn’. The dilemma is that this peak has characteristics of both ‘true’ and ‘false’ turns. We explore our cycle checklist. »
The Brexit has been painful for UK banks, but also for REITs with the trouble of many open-ended funds sold in the UK mainly. But what about the stocks themselves ? Well, if you look at the following charts from Exane, there are probably some value to look for from there…
Many fund managers pried their ability to pick stocks, or, as the jargon goes « generate alpha » through stock selection (and with that the handsome fees they charge you). But the following 2 graphs show that rather than picking the right stocks, it’s better to pick the right sectors…
That’s a severe correction (knowing it started way before the UK referendum). But Goldman’s analyst add some interesting comments:
» Whilst EUR funding is exhibiting no sign of strains, funding pressures are gradually building in USD (USD/EUR and USD/GBP cross-currency basis) and GBP funding indicators. This said, they remain at levels that are a fraction of previous crises (2009 and 2012) peaks. We maintain that funding shocks are unlikely, given generous central bank backstops – these were sufficient to contain the aftermath of both the Lehman and European sovereign crises. »
European banks are probably stay in such a comatose stage for some time, as long as there are no sign of steepening yield curve or a better macro environment. On top of that, due to there high beta, banks are considered a good play to short the market when everything goes wrong. So be careful if you decide to pick one.
« Low global bond yields are pressuring US Treasury yields, while inflation outlooks are muted and the Fed appears on hold with rate hikes. All of these points favor high dividend yields »… Makes sense although this is massively pushing investors into the most expensive territories of equity markets !
And the answer from Barclays:
« While valuations are certainly not pricing in a full-blown global recession, we are not far away from pricing a 2012-style moderate recession. If such a scenario were to fully materialise, the fundamental floor appears to us to be a STOXX 600 level of 300 (c. 10% below today’s levels). However, if a more benign economic scenario were to occur, as per our economic team’s forecasts, we expect valuations to eventually revert higher. Till further evidence of this materializes, in the near-term, we expect markets to remain volatile and follow economic and political developments. »
Well, the markets are heading into panic mode, again. Brace yourself ! Lots of opportunities will probably arise, but wait a little, that dust settles down before chasing quality stocks at discounted prices, because right now, the market is still expensive and most quality stocks trade at a premium…
For now on, « deflationary fears have receded », claims Goldman’s strategists. So far so good for European equities which shot up more than 13% YTD and still have steam to run up further, according to the bank.
Barclays’ equity research theme has published a note about the 3 questions investors may ask about ECB QE and its impact on market.
Here’s the summary:
From Michael Hartnett and Brian Leung at Bank of America Merrill Lynch:
« BofAML’s base case for 2015 is bullish US$, bullish volatility, bearish spreads, bullish real estate, bullish stocks, bearish rates and more opportunistic in commodities & EM. We forecast higher global growth, lower liquidity, no deflation, lower expected returns: global stocks 4-8%, US dollar 3-5%, US house prices 3%, corporate bonds 2-4%, 30-year Treasury -5%, and 1-3% for commodities. 2015 has begun bearishly with lower oil, yields and, today, a buy signal for risk assets from our contrarian Bull & Bear Index.
Our bottom lines: Our conviction in US recovery is high. We expect, by late-spring, lower oil, lower currencies and lower rates to start boosting European and Asian
We believe risk assets will ultimately generate positive returns this year, but investors may need to have patience and tolerate large market swings.
Short-term we expect risk assets to rally into the ECB QE event on Jan 22nd but volatility could quickly reappear in February if the ECB package marks “peak QE expectations”, the US earnings season is impacted by the US dollar and “credit events” related to the oil collapse become more visible. We would be more aggressive buyers of risk later in Q1. »
Well, this question is far from new. Actually it was raised soon after the first tention in EZ sovereign bond market in 2010. As already mentioned on this blog, the theme of a balance sheet recession is rooted deep down the EZ economy. Unfortunatelly, the public and governments don’t seem to properly grasp the issu. But some people do, especially in Japan… Lire la suite