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Market Insights – April 19, 2021

Each week, a team of experts shares its market views with you!

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Essentials

The technical outlook remains positive for copper which, after testing its 50-day moving average, headed back upwards. This trend is underpinned by bullish commentary from brokers, who recognise the key role that copper will play in the transition to a green economy.

The quarterly earnings season has kicked off for US companies. We expect significant positive surprises given the strength of recent macro data. Analysts are overly conservative in their estimates. Earnings reports over the next few weeks will lay the groundwork for upwards revisions to full-year forecasts.

China’s economy grew by 18.3% in Q1, in contrast with its 6.8% decline for the year-earlier period. Given the favourable comparison basis, this latest figure is in line with expectations. Growth momentum seems poised to spread from industrial output to consumer spending following a 34.2% increase in retail sales in March.

Stock markets soar as the Fed reins in interest rates and the dollar

In periods of crisis, investors usually turn to the currencies that offer the most stability. So it’s not surprising that the Swiss franc was highly sought after for most of 2020 even though interest rates were well below zero, which is not good for investors holding francs – especially the large number of non-Swiss investors.

But as confidence in the real economy and the financial markets returns, investors start to shift their focus to interest rate spreads between currencies. And this trend seems to be weighing on the Swiss franc at the moment, much to the SNB’s relief.

The franc’s recent bout of weakness against the euro has provided a boost to Swiss exporters – and to whole swathes of the Swiss economy. Whether the single currency can continue to gain ground will probably depend on how quickly the vaccination campaigns pick up, as the economic climate in Europe won’t be able to get back to normal until that happens. 

The US dollar was also weighed down by the crisis in 2020 but now appears to have entered a more stable phase. The greenback’s sensitivity to changing interest rate spreads between the US and the rest of the world has been particularly stark in recent months. The steep uptick in US bond yields early this year clearly sparked investors’ interest in the dollar. With the country’s fiscal and current account deficits deepening, the dollar seems to need a substantial interest rate spread in order to attract international capital flows and get back onto an upward track.

Yet the Fed’s reassuring comments have nipped that trend in the bud. Jerome Powell and his colleagues have prevented US interest rates from rising for now, although we feel the upward momentum is unstoppable in view of the burgeoning recovery and nascent signs of inflation in the USA.

Of course, the Fed’s highly accommodative attitude has been welcomed by stock markets, which – with the notable exception of a handful of emerging markets – continue to hit all-time highs. In response to rising short-term optimism on equities, we recommend taking some profits on the markets and themes that have fared best recently (particularly in the US) in order to bring portfolios into line with the recommended weightings in our tactical allocations.

Europe : l’heure est au rattrapage

It’s now clear that the worsening public health situation in Europe will push back the eurozone’s economic recovery by several months – the time needed for the region to ramp up its vaccination campaigns. Like in the States, the lockdown led to a considerable build-up of savings and pent-up demand among consumers. So once the pandemic has been brought under control, this should prompt a solid rebound in consumer spending, especially for durable goods and services.

European stock markets were given a boost by the rise in interest rates early this year, and the stage looks set for these markets to make up some ground. European stocks are currently trading at a 20% discount relative to global equities, which has considerably increased their appeal. What’s more, European stock markets have not experienced any aggregate inflows for several years, unlike US and Asian markets. Within Europe, we think the UK market is appealing.

The smooth vaccine rollout should help that country to get out of the crisis more quickly than expected. UK stocks have been underperforming considerably for a long period – especially since the Brexit vote in 2016 – and equity valuations have now fallen to an all-time low compared with the eurozone. The UK market is even more underbought than eurozone markets. Pent-up demand is very likely to lead to a major spending spree, making the reopening of European economies a very hot topic.

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