Weekly View – Bad but not mad

The CIO office’s view of the week ahead.

The Italian government’s budget deficit target is 2.4% for each of the next three years. It could have been worse: at one stage, the populist coalition’s spending plans looked like raising the deficit to 6%. But its actions set the stage for a clash with Brussels, while Italy’s credit rating could be downgraded in the coming weeks. For some time we have been underweight Italian bonds (as well as euro area peripheral bonds in general), a decision that last week’s development helps to solidify.

The last-minute trade deal reached between Canada and the US after a long stand-off offers more tangible good news. The deal frees the Trump administration to concentrate on trade wrangles with China, which remains its core concern—and here there are few signs of progress.

Last week’s Fed policy meeting saw a dichotomy emerge between the Fed’s optimism about economic prospects and its stable inflation projections. The latest ‘dot plot’ chart reveals some tension within the Fed regarding where the federal funds rate will be in 2019. With uncertainty abounding, it cannot be excluded that at some stage inflation (or growth) numbers will upset the Fed’s well-laid plans for monetary tightening—something that will inevitably cause jitters among investors.

Rising rates and solid economic data enabled the dollar to continue to rack up gains against other major currencies. But the rise in prices for oil meant that the currencies of commodity producers did not do as badly as others last week. In view of our cautious tactical stance on emerging markets, we are more comfortable playing the rebound in oil via energy-related developed market investments, where we are already overweight.


César Pérez Ruiz, Head of Investments & CIO

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