Weekly View – The dark horse wins

The CIO Office's view of the week ahead.

Christine Lagarde stole headlines this week with her unexpected nomination to succeed Mario Draghi at the ECB. Equities and bond markets rallied sharply around the world on the news. Given Ms Lagarde’s past history of support for the ECB’s easy monetary policy, her appointment was taken as confirmation that the ECB will continue on its renewed dovish course after its new president takes the helm. In our view, Lagarde’s political background could go a step further in lending support to coordinated fiscal stimulus. With this and Italy avoiding an Excessive Deficit Procedure by the EU Commission, we like European high yield and have moved our position to neutral on the asset class.

Banks will be first up to report Q2 earnings. After US banks passed the Fed’s annual stress tests with flying colours, they are well positioned to pay out any net profits to shareholders as dividends. However, we expect analyst projections will need to come down, given that net interest margins are shrinking as the yield curve moves downward. For this reason, we prefer to play banks via fixed income rather than equity markets.

This week Fed chairman Jerome Powell will deliver his semi-annual testimony on monetary policy and the state of the economy to a committee of the House of Representatives. We will also have the latest US consumer price index (CPI), which the central bank is particularly focused on in directing its next moves. Given how inflation has been trending, we expect that the CPI report will underscore the likelihood of a near-term rate cut. With this and Trump’s recent Tweets on currency manipulation, we anticipate increased downward pressure on the US dollar and are leaning more positive on emerging market currencies.

César Pérez Ruiz, Head of Investments & CIO, Pictet Wealth Management

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