Market Insights – April 16th, 2018

Weekly financial & economic analysis.

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Essentials

The turnaround in the eurozone can now be seen in sovereign ratings. Ten days after Standard & Poor’s, Moody’s raised Spain’s rating to Baa1. The rating agencies are ex-pected to upgrade Portugal and Italy soon too.

The Swiss franc is nearing the level it was at in early 2015, before the SNB dropped the floor rate against the euro. A softer franc is good for the Swiss economy and recently prompted ana-lysts to revise up their 2018 earnings forecasts on Swiss companies.

The latest wave of sanctions against Russia sparked a sharp rise in some commodity prices. Aluminium, for in-stance, was up by more than 10%. Oil prices were pushed up (+8%) by the conflict in Syria as well as by positive newsflow like the decrease in inventories in certain oil-producing countries.

Another false start for bond yields?

Fears of an upswing in inflation are slow-ly fading in the USA. They had been trig-gered by January retail price and wage figures, which came in above expecta-tions. But these indicators have thankful-ly lost momentum since then. Growth in hourly wages is still below 3% year over year, and retail price inflation is close to the 2% target set by the Federal Re-serve. The stage is set for monetary policy to continue to return to normal, with economic growth quite firm and the country nearing full employment. All of this suggests that the Fed will keep raising rates by a quarter point every three months until the end of the year. The situation is very different in Europe, where inflation is still well below the annual target of 2% set by most central banks. In the eurozone, prices seem to have levelled off in recent months, with annual inflation more often than not com-ing in close to 1%. The euro’s strength has not helped the European Central Bank (ECB) either, and has even compli-cated the end of Mario Draghi’s term of office. The ECB is scheduled to wind up its quantitative easing programme late this year. But investors are waiting for confirmation of this and are preparing for the first rate hike. However, any sign that rates might rise could push the euro up further. Maybe Mr Draghi would prefer to be at the helm of one of the Scandinavian central banks instead. Both Sweden and Norway are in a very different situation to the ECB. Their currencies are still being pushed downwards, while inflation is struggling to take root. Europe’s persis-tently weak inflation has hit bond mar-kets hard. Yields are still at rock bottom. And the low yields in Europe seem to have had a knock-on effect on bond markets in economies that are much further on in the macro cycle, like the USA, Canada, countries in Oceania and emerging markets.

Spain’s fundamentals are still strong – Olé!

Despite investors’ fears, Spain’s econo-my has so far not been affected by the Catalan crisis, as indicated by Q4 GDP growth (+3.1% year over year). What’s more, economic data suggest that growth will remain above the eurozone average for the fourth year in a row. The country’s economy has recovered re-markably well since the financial crisis. This is due partly to the reforms put in place to boost output and employment and partly to the number of new compa-nies in high-value-added services sec-tors like research and technology. The recovery looks set to last. Even though the ongoing political tensions between Madrid and Catalonia continue to cast a shadow, the situation is not as tense as it was some months ago. Despite these solid fundamentals, political uncertain-ties have got the upper hand and have weighed on Madrid’s stock exchange since last summer. The market is cur-rently trading at a major discount to the Euro Stoxx 50. We think the Spanish market can do some catching up, par-ticularly relative to the Italian market, which has been one of the best perform-ers within the eurozone even though the country has not yet formed a government and growth is still much weaker. We are bullish on domestic sectors, which we invest in through our Spain Rediscovery Certificate.

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