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CIO team, 06.05.2018
Following a weak Q1 risk assets rebounded in the month of April, supported by robust corporate earnings in the US and in Europe, fading trade war threats and stabilizing business sentiment. Volatility dropped across equities and bonds, as investors came to terms with rising inflationary pressures and higher Fed policy rates. US 10-year Treasury yields temporarily breached the psychologically important 3% threshold for the first time in 4 years, sending a clear message on the future direction of inflation and causing anxiety about the resilience of equity markets. Trade tensions between the United States and China eased somewhat, in light of the measured reaction of the Chinese authorities to US tariffs. Economic data overall also helped support risk assets, with a rebound in business sentiment in the major developed economies, although the UK saw weakness continue to creep into the Q2 releases. Global equities (+1.0%) outperformed global developed sovereign bonds (-0.3%). Brent crude (+7%) and GCC equities (+4.0%) put in a particularly strong performance.
EM debt underperformed, both in hard (-1.5%) and local currency (-2.2%), on rising US Treasury yields, deteriorating EM earnings revisions and a stronger dollar. US High-Yield corporate credit (+0.7%) staged a comeback, following the stabilization in equity markets and the positive US macroeconomic newsflow.
Equities were supported by a strong earnings season, particularly in the US (+0.4%) and in Europe (+6%). The UK market (+6.8%) outperformed, helped by receding trade tensions, the weakening of the currency and the rapidly dropping probability of a May rate hike. Indian equities (+6.6%) were led higher by a rally IT stocks.
In the GCC the KSA (+5.2%) outperformed other equity markets, on the expectation of MSCI inclusion. Abu Dhabi (+2.2%), led higher by First Abu Dhabi Bank, outperformed Dubai (-0.3%), dragged down by Damac.
The US dollar (+1.4%) rallied against major peers, on disappointing ex-US economic surprises and crowded short positioning on the US currency. The largest gains were recorded against the Swedish Krone (+4.9%) and the Swiss Franc (+3.9%).
Brent crude (7.0%) rallied strongly, with OPEC-led production curbs and sustained demand keeping the market tight. Gold (-0.8%) continued to record a lacklustre performance, capped by rising US yields.
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