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Market Insights – 15 octobre 2018

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

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Essentials

Despite the trade tensions, Chinese exports far outstripped analysts’ expectations in September, rising 14.5% year on year compared with 9.8% in August. This may be because the yuan has lost ground, making Chinese products more competitive, or it may be because people are buying Chinese products before the tariffs potentially take effect between now and January 2019.

The conservative Christian Social Union party, which is a key coalition partner for Angela Merkel, suffered heavy losses in the regional elections in Bavaria. This is no doubt because confidence in Merkel’s government is waning. More and more of Europe’s major political parties are losing ground to smaller, alternative parties, and this could weaken the region.

Gold has been boosted by market volatility and broke through its major resistance level of USD 1,200/ounce. It recorded it best daily rise since the Brexit vote, a sign that investors have quickly become more bearish.

Rising US interest rates test investor’s confidence

Just like at the beginning of the year, the US stock market succumbed to fears sparked by monetary-policy tightening. US ten-year yields reached 3.25%, which served as a reminder that the US economy will be held back if interest rates are raised too quickly and that the stock market will soon have to compete with higher bond yields. At the same time, the Fed chair has adopted a relatively hawkish stance, stating that monetary tightening is far from over in the USA. Yet the latest inflation figures are actually quite reassuring, both for the Fed and for investors. US inflation seems to have levelled off throughout the supply chain, even though energy prices are at a four-year high. Imported inflation has dropped to 3.5% year on year, while the rise in producer prices has slowed to 2.5% and retail prices are only increasing by 2.3% (2.2% excluding energy and food). These figures are all well below the levels seen early in the summer. It therefore seems surprising that the Fed has been so cautious recently, although the Fed’s attitude surely has more to do with unemployment figures being so low. The US economy is close to full employment, which could drive up wages and cause the economy to overheat. Perhaps once job creation figures slow and the unemployment rate stabilises, the Fed will be able to relax. In the meantime, the reassuring inflation figures and recent bout of weakness on the stock markets seem to have put a stop to the rise in US yields. This is a welcome turn of events, and certainly necessary if investors are to regain confidence in US equities, which lost a lot of ground last week. After all, Wall Street shouldn’t decline any further if the fundamentals are anything to go by: the US economy is booming, as are corporate earnings, and stock-market valuations are far from extreme. What’s more, the recent correction has knocked investor optimism. We therefore expect US stocks to rally in the days or weeks to come. Other financial markets, which are still lagging far behind their US counterparts, should also pick up.

Alternative funds: a look back at the third quarter

Risk assets as a whole did well over the summer and ended the third quarter in positive territory. But performances varied considerably within this asset class, with growth sectors faring very well while other markets – and especially emerging markets – remained under pressure. At the same time, sovereign yields rose steadily. Alternative strategies put in a flat performance over the quarter. But once again, there were major disparities between managers, most often because of their investment style. Long/short equity strategies that are long on growth and tech stocks posted solid gains, but those focussing on value and emerging-market stocks suffered heavy losses. Overall, these strategies lost 2%, although that figure doesn’t tell the whole story. We nevertheless remain bullish on these strategies, particularly on market-neutral products. Credit strategies were up across the board. Arbitrage strategies and strategies involving less liquid market segments continued to be buoyed by the strength of the underlying market despite the rise in sovereign yields. We still remain bearish on these strategies, given that spreads have narrowed. Finally, systematic strategies performed well, boosted by the gradual rise in interest rates and the uptrend on the stock markets, where volatility remained low during the quarter, especially in the USA.

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