Weekly View – Going “loco”

The CIO office’s view of the week ahead.

US equities declined roughly 7% over six days up to last Thursday. While the decline is in line with the median drawdown level since 2007, it was notable for its length, given the average drawdowns over the same time period lasted 40 days, rather than six. Most likely, investors were reacting to the higher risk environment created by rising bond yields. However, compared with February’s sell-off, there is less exuberance on the technical side. Systematic traders have reduced their equity exposure and leverage, decreasing the likelihood of a self-sustained sell-off. At the same time, while US economic fundamentals remain strong, markets have started to be concerned about the corporate earnings outlook.

Unsurprisingly, emerging market (EM) equities have been hit hard (although they fell less last week in USD than US equities), leaving all major EM equity markets down year to date, in USD terms. We remain underweight global EM equities.

In Europe, the macro picture could suffer a setback after Prime Minister Theresa May rejected Brussels’ draft deal proposals on Brexit on Sunday night. Meanwhile, the outcome of Bavaria’s elections in Germany serve to weaken Chancellor Angela Merkel’s position, which could add further pressure to Brexit negotiations. Italian bond yields continue to rise amid budget negotiations with the EU, increasing the government’s cost of borrowing. We are conscious of the dangers of confrontation between Rome and Brussels, and note Mario Draghi’s hint that the European Central Bank will not come to Italy’s rescue.

We will focus our attention on micro fundamentals over the coming weeks, particularly in regard to how companies factor trade tensions into their outlook comments. But valuations are at an attractive level, and with our put options on client portfolios in place, we will be looking for opportunities to sell them.

 

César Pérez Ruiz, Head of Investments & CIO

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