Better policy visibility supports markets

Chief Investment Officer's team
27 June 2021
Better policy visibility supports markets
Global stocks gained following US Congress significant progress on infrastructure stimulus


  • Global stocks gained following US Congress significant progress on infrastructure stimulus
  • Flash PMIs confirmed a strong global economy with Europe and Services now accelerating
  • Our scenario is unfolding and we still believe that interest rates are too low. TAA positioning unchanged

For most of last week, market participants were busy adjusting to an evolving monetary backdrop: the Fed had clearly taken note of better than expected growth by moving forward their interest rates projections at the June FOMC meeting, and the rise in inflation was confirmed by the core PCE data. Many Fed officials came out with various speeches, sometimes hawkish, sometimes dovish, which together reinforced a clear message: the economy is strong, the tapering debate is open, but inflation is transitory and the first hikes in interest rates should not happen before late 2022 at the earliest. Overall, the communication looks brilliant: the shift is now clear, but a shock was avoided.

Flash PMIs released at the same time indeed confirmed that the global economy is doing very well. The leadership for the US and from manufacturing sectors is gradually shifting to Europe, catching-up, and services, which benefit from the reopening. Of course, everything is not perfect on the virus front but so far the situation looks under control in most developed regions.

At the end of the week, another good news hit the tape: a bipartisan agreement on an infrastructure package in the US, which should inject $1.2 trillion over 8 years.

No surprise then that global stocks had an excellent week, adding 2.4% in DM and 1.4% in EM. Interest rates ended the week marginally higher, at 1.52% for the 10-year, which by contrast keeps on surprising us. While we largely agree with the fact that inflationary pressures are transitory, the transition could be long and the absolute level is too low for us. This is why we keep a clear underweight position on government bonds and expect some turbulence in the summer, even if the big picture remains overall favorable. Stay safe.

Cross-asset Update

The main risk-event investors are focusing on for the second half of this year is the tapering of asset purchases, in other words the winding down of bond-buying programs which were started by the Federal Reserve in various rounds after the Great Financial Crisis, the largest one implemented after the pandemic and still ongoing. Jay Powell is expected to shed some clarity on tapering at the late-August Jackson Hole meeting and by year-end a public statement should be released about its implementation, planned by the Fed as per consensus for the beginning of 2022. This is key to the direction of long-dated Treasury yields, which were crushed by the Fed’s asset purchases and are likely to be pushed higher by their reversal, Quantitative Tightening. If history is anything to go by, yields should rise from the Jackson Hole announcement into the early-2022 implementation timeline. This would constitute a headwind for long-duration assets like gold and EM market hard-currency debt, with most downside risk more likely for the former than the latter.

The tapering overhang should be weighing on gold and in our view it is hard to see material upside till investors get more visibility on Quantitative Tightening. Weakness should set in as we approach QT implementation, with some muddle-through in between. We hold the view that investors should stay sidelined till the Jackson Hole Symposium and then reassess based on the Fed’s message. Key support levels for gold are at $1,700 and 1,600/oz, with the former likely to be breached, if real rates start rising later this year as per our assumptions. Former Treasury Secretary Larry Summers sees US inflation ending 2021 at 5%, not in line with that kind of ‘temporary’ notion in terms of price pressures advertised by the Fed.

Investors have been chasing EM debt for its appealing yield, though of late this has diminished substantially, with the main EM dollar debt benchmarks showing the lowest level of carry in decades. This leaves investors exposed to active risk, driven by rates and spreads. Barring any risk-off episodes which would see spreads widen, the total return of EM bonds remains capped due to the risk of rising US yields, as argued above. Assuming no change in US yields or EM spreads the yield-to-worst on the asset class is currently north of 3.5%,. which anyway is unlikely to be fully cashed in acting as a buffer for capital losses to be incurred as per our base case of rising US rates by year-end. We advise investors to bias their EM credit portfolios towards EM dollar sovereign and corporate debt, the former offering more value though longer duration, the latter being more defensive though not outright cheap. We hold the view that EM local debt remains exposed to a relevant dollar risk, following the recent shift in tone by the Federal Reserve likely to embolden dollar bulls. Indeed, inflation is now an issue in many EM countries as well, so local yields could rise alongside US yields, which would then be a double whammy for local bonds.

Hold your breath for Jackson Hole’s and the following Fed announcements, especially if you are a gold or fixed-income investor.

Fixed Income Update

In our opinion, there are umpteen rationales behind the recent and much analyzed US 10-year Treasury yield advance, which was the biggest weekly increase since March. While the earlier Fed's dovish stance was supposed to result in a red-hot economy leading to higher inflation and expectations of higher yields, the recent hawkish turn in the last FOMC meeting seems to have soothed market nerves regarding inflation. Now how long the relief permeates in the market is a thing to ponder about. However, a more important consideration from an asset allocation perspective is what the fair value of the US benchmark yield should be. We believe there is no rationale as to why the 10-year yield should be lower than pre-pandemic levels when the economy is on a growth path, and inflation expectations are higher now than ever in the last decade. That leads us to our conclusion that the 10-year should ideally be firmly above 1.6% in the current economic scenario.

Another question investors should worry about is how EM Debt would perform when developed market yields go up. A recent Fed report has observed that when yields go up as a result of unexpected monetary policy tightening, EM Assets suffer, while if the yields go up as a result of growth as observed by higher break-even inflations, EM Assets remain resilient. We believe the current scenario falls into the latter section, and hence EM assets should continue to perform. Moreover, EM, on the whole, looks a lot less vulnerable than in 2013 in terms of current account deficits and FX reserves. Hence, we advise investors to reduce their allocation to developed market High Yield, which looks quite rich valuation-wise, and increase allocation to EM Debt to improve portfolio performance.

With the upcoming Fed taper announcements and inflation readings expected to continue their positive surprise, fixed-income investors should be wary of taking excessive risks. In addition, the labor department's June jobs data would be a big event for the market following underwhelming numbers in the previous two months. The Fed has signaled that the US reaching full employment is its key priority and would ultimately decide the timeline of tapering. The projections indicate the addition of 700k jobs, which would be the second-biggest since last September.

Under the above scenario, the volatility should increase ad it is as important to focus on the return as much on protection to the downside. Two asset classes clearly stand out for us. We have liked DM Financials’ subordinated debt since the second half of 2020. Recently, Federal Reserve's stress tests showed the industry built up a stockpile of cash during the pandemic, which should provide a tailwind to the asset class. The second asset class is Chinese Govt Bonds that provide an opportunity for a pickup in yields of more than 3% while providing strong diversification to the portfolio as its correlation to the other EM Assets remains very low, as witnessed during the Dec 2018 and Mar 2020 market selloffs.

Equity Update

Global equities gained 2.3% last week, a reversal of the previous weeks 2% fall, buoyed by positive data releases on economic growth and manufacturing PMI’s as well as optimism over additional fiscal stimulus. The gains of last week extend a trajectory of steady and strong performance. U.S. equities retained market leadership and the S&P 500 is at a record high, and the Nasdaq just short of one with investors shrugging off inflation worries and the Fed’s more-aggressive “dot plot”, reassured by the Fed Chair’s conviction that inflation should subside soon. The agreement on a $1.2 trillion infrastructure package should further support demand. Consumer spending in the U.S. in May was well above pre-pandemic levels. Eurozone and U.K. equities also posted strong gains for the week, with the Fed’s dovish tone echoed by the Bank of England. Asian equities finished higher, but after a choppy week that saw Japanese markets with some wild swings. The slight pullback in the U.S. dollar from last week's spike and recent actions out of China to crackdown on speculation in the commodity and cryptocurrency markets, helped Asian markets perform in line with their DM counterparts. UAE saw a flat Dubai market whilst the Abu Dhabi Index fell a percent last week. Real estate stocks are seeing some traction as sales data, both off -plan and secondary, remain strong.

Oil’s rally with Brent above $76 a barrel saw the energy sector as the best performer for the week and retain its sector leadership for 2021. The higher treasury yields and improving economic data boosted the global financial sector, the second-best performer year to date and a continuing conviction call from us. Banks in the U.S. were supported by expectations for increases to share buyback programs and dividend payments, after a strong showing in the Fed's latest stress test. The large banks continue to have strong capital levels and buybacks could total $100bn over the next 18 months. US large cap banks are trading on a 10.5% yield to the end of FY22 (8% buyback and 2.5% dividend).

Earnings growth and the US 10-year treasury yield are currently the most dominant factors affecting sentiment. Both are favourable. However, whilst last week was buoyant for markets globally, with the VIX at year lows, the continuing yo-yoing over the past two weeks suggests there is still lingering uncertainty over the path of interest rates, inflation and monetary policy. Equities globally should continue to add to the year to date stellar returns, but there could be some bumpy stretches ahead in H2. Selectivity is key to higher returns from here on. Growth and value are more in sync, the former finding support from steady yields and the latter synchronous with cyclical sectors boosted by positive economic data.

The exponential performance seen by COVID winners in 2020 and recovery stocks in the first few months of 2021 may not continue, but demand trends in athleisure and cloud services remain strong. Nike posted strong quarterly profits and its focus on digital sales that were 73% higher y/y paid off, the stock rallying 15% on Friday. Microsoft continues to benefit from its dominance in operating systems and cloud services and is flirting with a $2 trillion market cap.

Written by:


This document is prepared by Emirates NBD Bank (P.J.S.C) (“the Bank” or “Emirates NBD”), licensed and regulated by the Central Bank of the UAE (“Central Bank”) and the Securities and Commodities Authority of the UAE (“SCA”) and subject to regulation, supervision and control of the Central Bank and SCA, having its head office at Baniyas Road, Deira, PO Box 777, Dubai, United Arab Emirates. This document may be distributed and/or made available by the Bank and its affiliates and subsidiaries, including Emirates NBD Capital KSA CJSC (“ENBD Capital”) (through its website, its branches or through any other modes, whether electronically or otherwise).

Emirates NBD and its affiliates, subsidiaries and group entities, including its shareholders, directors, officers, employees and agents are collectively referred to Emirates NBD Group.

Any person (hereinafter referred to as “you”, “your”) who has received this document or have access to this document shall acknowledge and agree to the following terms.


Data/information provided in this document are intended solely for information or illustrative purposes and are not designed to initiate or conclude any transaction.

This publication may include data/information taken from stock exchanges or other third-party sources from around the world, which Emirates NBD reasonably believes to be reliable, fair and not misleading, but which have not been independently verified. The provision of certain data/information in this publication may be subject to the terms and conditions of other agreements to which Emirates NBD is a party. Opinions, estimates and expressions of judgment are those of the writer and are subject to change without notice. Emirates NBD or any member of Emirates NBD Group makes no representation or warranty and accepts no responsibility or liability for the sequence, accuracy, completeness or timeliness of the information or opinions contained in this publication. Nothing contained in this publication shall be construed as an assurance by Emirates NBD that you may rely upon or act on any information or data provided herein, without further independent verification of the same by you.

The contents of this document are prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors, including those relevant to the determination of whether a particular investment activity is advisable. Emirates NBD does not undertake any obligation to issue any further publications or update the contents of this document. Emirates NBD may also, at its sole discretion, update or change the contents herein without notice. Emirates NBD or any member of Emirates NBD Group does not accepts no responsibility whatsoever for any loss or damage caused by any act or omission by you as a result of the information contained in this publication (including by negligence).

References to any financial instrument or investment product in this document are not intended to imply that an actual trading market exists for such instrument or product. Certain investment products mentioned in this document may not be eligible for sale in some jurisdictions, and they maynot be suitable for all types of investors. The information and opinions contained in this publication is provided for informational purposes only and have not been prepared with any regard to the objectives, financial situation and particular needs of any specific person, wherever situated. If you wish to rely on or use the information contained in this publication, you should carefully consider whether any investment views and investment products mentioned herein are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You should also independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professional advisers or experts.


This publication may be provided to you upon request (and not for distribution to the general public), on a confidential basis for informational purposes only, and is not intended for trading purposes or to be passed on or disclosed to any other person and/or to any jurisdiction that would render the distribution illegal.


None of the content in this publication constitutes a solicitation, offer, recommendation or opinion by Emirates NBD to buy, sell or trade in any security or to avail of any service in any jurisdiction. This document is not intended to serve as authoritative legal, tax, accounting, or investment advice regarding any security or investment, including the profitability or suitability thereof and further does not provide any fiduciary or financial advice. This document should also not be used in substitution for the exercise of the prospective investor’s judgment.

Third Party

This publication is not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law or regulation. It is the responsibility of any person in possession of this publication to investigate and observe all applicable laws and regulations of the relevant jurisdiction. This publication may not be conveyed to or used by a third party without the express consent of Emirates NBD or its affiliates, subsidiaries or group entities distributing this document. You should not use the data in this publication in any way to improve the quality of any data sold or contributed by you to any third party.


Notwithstanding anything to the contrary set forth herein, Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries shall not, directly or indirectly, be liable, in any way, to you or any other person for any: (a) inaccuracies or errors in or omissions from this publication including, but not limited to, quotes and financial data; or (b) loss or damage arising from the use of this publication, including, but not limited to any investment decision occasioned thereby. Under no circumstances, including but not limited to negligence, shall Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries be liable to you for direct, indirect, incidental, consequential, special, punitive, or exemplary damages even if Emirates NBD has been advised specifically of the possibility of such damages, arising from the use of this publication, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business.

This publication does not provide individually tailored investment advice and is prepared without regard to the individual financial circumstances and objectives of person who receive it. The appropriateness of an investment activity or strategy will depend on the person’s individual circumstances and objectives and these activities may not be suitable for all persons. In addition, before entering into any transaction, prospective investors should: (i) ensure that they fully understand the potential risks and rewards of that transaction; (ii) determine independently whether that transaction is appropriate given an investor’s investment objectives, experience, financial and operational resources, and other relevant circumstances; (iii) understand that any rates of tax and zakat or any relief in relation thereto, as may be referred to in this publication may be subject to change over time; (iv) consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment; (v) understand the nature of the investment and the related contract (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk; and (vi) understand any regulatory requirements and restrictions applicable to the prospective investor

Forward Looking

Past performance is not necessarily a guide to future performance and should not be seen as an indication of future performance of any investment activity. The information contained in this publication does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. Certain matters in this publication about the future performance of Emirates NBD or members of its group (the Group), including without limitation, future revenues, earnings, strategies, prospects and all other statements that are not purely historical, constitute “forward-looking statements”. Such forward-looking statements are based on current expectations or beliefs, as well as assumptions about future events, made from information currently available. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “seek”, “believe”, “will”, “may”, “should”, “would”, “could” or other words of similar meaning. Reliance should not be placed on any such statements in making an investment decision, as forward-looking statements, by their nature, are subject to known and unknown risks and uncertainties that could cause actual results, as well as the Group’s plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.


Data included in this publication may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, and credit risk. Emirates NBD may use different models, make valuation adjustments, or use different methodologies when determining prices at which Emirates NBD is willing to trade financial instruments and/or when valuing its own inventory positions for its books and records. The use of this publication is at the sole risk of the investor and this publication, and anything contained herein, is provided "as is" and "as available." Emirates NBD makes no warranty of any kind, express or implied, as to this publication, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.

Investment in financial instruments involves risks and returns may vary. The value of investment products mentioned in this document may neither be capital protected nor guaranteed and the value of the investment product and the income derived therefrom can fall as well as rise and an investormay lose the principal amount invested. Investment products are subject to several risks factors, including without limitation, market risk, high volatility, credit and default risk, illiquidity, currency risk and interest rate risk. It should be noted that the value, price or income of securities denominated in a foreign currency may be adversely affected by changes in the currency rates. It may be difficult for the investor to sell or realise the security and to obtain reliable information about its value or the extent of the risks to which it is exposed. Furthermore, the investor will not have the right to cancel a subscription for securities once such subscription has been made. Prospective investors are hereby informed that the applicable regulations in certain jurisdictions may place certain restrictions on secondary market activities with respect to securities.

Before making an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment. In receiving this publication, the investor acknowledges it is fully aware that there are risks associated with investment activities. Moreover, the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described in this publication and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with the investor.

Intellectual property

This publication has been developed, compiled, prepared, revised, selected, and arranged by Emirates NBD and others (including certain other information sources) through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, and money and constitutes valuable intellectual property of Emirates NBD and such others. All present and future rights in and to trade secrets, patents, copyrights, trademarks, service marks, know-how, and other proprietary rights of any type under the laws of any governmental authority, domestic or foreign, shall, as between the investor and Emirates NBD, at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties.

Except as specifically permitted in writing, you should not copy or make any use of the content of this publication or any portion thereof or publish, circulate, reproduce, distribute or offer this publication for sale in whole or in part to any other person over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet or construct a database of any kind. Except as specifically permitted in writing, you shall not use the intellectual property rights connected with this publication, or the names of any individual participant in, or contributor to, the content of this publication, or any variations or derivatives thereof, for any purpose. This publication is intended solely for non-commercial use and benefit, and not for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. By accepting this publication, you agree not to use, transfer, distribute, copy, reproduce, publish, display, modify, create, or dispose of any information contained in this publication in any manner that could compete with the business interests of Emirates NBD. Furthermore, you should not use any of the trademarks, trade names, service marks, copyrights, or logos of Emirates NBD or its subsidiaries in any manner which creates the impression that such items belong to or are associated with you, except as otherwise provided with Emirates NBD’s prior written consent. You shall have no ownership rights in and to any of such items.


This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the London branch of Emirates NBD Bank (P.J.S.C) which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority in the UK. Some investments and services are not available to clients of the London Branch. Any services provided by Emirates NBD Bank (P.J.S.C) outside the UK will not be regulated by the FCA and you will not receive all the protections afforded to retail customers under the FCA regime, such as the Financial Ombudsman Service and the Financial Services Compensation Scheme. Changes in foreign exchange rates may affect any of the returns or income set out within this publication.


This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the Singapore branch of Emirates NBD Bank (P.J.S.C) which is licensed by the Monetary Authority of Singapore (MAS) and subject to applicable laws (including the Financial Advisers Act (FAA) and the Securities and Futures Act (SFA). Any services provided by Emirates NBD Bank (P.J.S.C) outside Singapore will not be regulated by the MAS or subject to the provisions of the FAA and/or SFA, and you will not receive all the protections afforded to retail customers under the FAA and/or SFA. Changes in foreign exchange rates may affect any of the returns or income set out within this publication. Please contact your Relationship Manager for further details or for clarification of the contents, where appropriate. For contact information, please visit


Emirates NBD Capital KSA CJSC (“ENBD Capital”), whose registered office is at P.O. Box 341777, Riyadh 11333, Kingdom of Saudi Arabia, is a Saudi closed joint stock company licensed by the Saudi Arabian Capital Market Authority (“CMA”) under License number 37-07086 dated 29/08/2007G (corresponding to 16/08/1428H) to deliver a full range of quality investment products and related support services to individuals and institutions in the Kingdom of Saudi Arabia. ENBD Capital is subject to Capital Market Law, and Implementing Regulations in the Kingdom of Saudi Arabia

ENBD Capital’s contact details are T +966 (11) 299 3900 and F +966 (11) 299 3955.

This document may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Investment Funds Regulations issued by the Capital Market Authority.

The Capital Market Authority does not make any representation as to the accuracy or completeness of this document, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. Prospective subscribers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities offered. If you do not understand the contents of this document, you should consult an authorised financial adviser.