Market Compass
October 2019

Edited by the Macro & Market Research Team.
A team of 13 analysts based in Paris, Cologne, Trieste, Milan and Prague runs qualitative and quantitative analysis on macroeconomic and financial issues.

The team translates macro and quant views into investment ideas that feed into the investment process.

  • One fourth of Investment Grade (IG) bonds have now negative yields; this radically alters portfolio considerations. The threshold for switching away from risky assets is higher than it used to be.

  • A global recession is not our core scenario, but monetary and fiscal support are required. We assume none of the three major risks (Brexit, US/China trade war, Middle East tensions) will materialize in the worst way.

  • In the upside-down world of negative yields, IG Credit is a new safe haven, as shown by relative low IG yield volatility. Equities remain cheap relative to bonds, and the Fed will remain more supportive than what the latest dot plot shows.

  • As a consequence, we prefer longer dated IG bonds over Sovereigns. Our mildly pro-risk allocation foresees an underweight in short-dated EUR Govies and cash. With the USD near its peak, Emerging Markets’ equities and bonds offer selective opportunities.

MARKET COMPASS
OCTOBER 2019

RELATED INSIGHTS

US INFLATION: RISING, NOT SOARING
Since the beginning of the year financial markets have started increasingly to worry about a sudden and strong re-turn of US inflation. Behind this stands the double boost from domestic demand coming from the widely expected re-opening of the economy in spring and the large fiscal stim-ulus the incoming Democratic administration will most likely deliver.
CHINA’S Q4 GDP GROWTH SURPRISED ON THE UPSIDE, BUT RISKS TO THE OUTLOOK HAVE INCREASED
This morning, China published its Q4 GDP growth alongside with December monthly activity data. Q4 growth accelerated to 6.5% yoy which lifted total 2020 GDP to 2.3%. December real activity data were more mixed. While exports came in strongly, important domestic demand components were a bit unsteady.
COVID-19 FACTS & FIGURES
US President-elect Joe Biden has unveiled a $1.9 trillion stimulus package proposal. Following the recent increase in cases, China has imposed new restrictions and lockdowns in the Hebei province. Canada has implemented new restrictions and a provincewide curfew in Quebec that will last until February 8. German Chancellor Angela Merkel warned that the recent rise in Covid-19 cases could force the country to prolong the nationwide lockdown until April.