Weekly View – Dancing Queen

The CIO office’s view of the week ahead.

Far-right presidential candidate Jair Bolsonaro claimed victory in the first round of Brazil’s elections on Sunday, albeit he did not obtain the over 50% of the vote required to secure a majority and avoid a run-off. Markets have grown more positive toward Bolsonaro since the start of his campaign and we think Paulo Guedes is a reassuring choice as his economic advisor. University of Chicago-educated and former banker Guedes has liberal economic leanings and favours privatisation and greater fiscal discipline. We will continue to monitor the situation and how it impacts our broader view on emerging markets (EM) in the lead up to the run-off vote on 28 October.

As the US enters its Q3 reporting season, the economy continues to be strong. Unemployment has dropped to its lowest level in nearly 50 years but wage growth remains below the yearly 3% level that could put pressure on corporate margins. While expectations for Q3 earnings growth is above 20%, we think the increasingly rich valuations create room for potential disappointment. We have taken advantage of the low volatility to add protection to our portfolios via put options on the S&P 500 and the Euro Stoxx 50.

Across the Atlantic, Theresa May danced to the tune of former Eurovision winners Abba at the Conservative party conference in the UK. An interesting choice, given the topic of the moment is the UK’s exit from the EU. The prime minister has managed to survive for now but her real test will be in Brussels, rather than Birmingham. Our core scenario remains that a “Bretend” outcome is possible, meaning Brexit in name only.

Finally, global bond yields rose on the back of more hawkish signals from the Fed, adding further justification to our underweight, short-duration position in US government bonds. Equities sold off last week as investors grew concerned that continued economic strength could push interest rates up to growth-restrictive levels in a rich valuation environment.


César Pérez Ruiz, Head of Investments & CIO

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