Find anything about our products, search our faqs, and more.
Type your query in the search above and press enter to see the results
Try typing "Card activation"
Chief Investment Officer's team, 06.06.2021
Last week was rich in terms of economic data, with an avalanche of monthly leading indicators, the PMI family, and the most awaited US job report for May on Friday
The big picture from the PMI indices was without a doubt upbeat. Services are retaking the lead from manufacturing activities, showing a clear reopening. It is uneven, with a strong outperformance from the US, followed by Europe, over emerging regions. Still, numbers are great, and the US monthly job report came out with a modest number of job creations. If anything, this should support the currently very accommodative stance from the Fed. Markets appreciated, with a broadly positive week across most of asset classes.
On Saturday, the G-7 reached an agreement on a minimum global corporate tax rate of 15%, to counter tax optimization from multinational companies. The G7 is actually not the world, and implementation remains to be seen. It however highlights smoother relations between America and other advanced economies, taking distance from the previous US administration, especially as the statement also included environmental measures. A broader G20 agreement would however be more impactful in the July meeting.
The week ahead will be quieter in terms of economic data. We will hold our monthly tactical asset allocation meeting on Tuesday, and will clearly question our currently pro cyclical positioning. On the positive side, our constructive scenario is unfolding. However, risks are rising as we still believe that interest rates are too low, and that behavioural factors reflect an excessive optimism, including the latest boom in so-called “meme stocks”. These are serious questions, and the timing is as always even more difficult to find. Stay safe.
The latest US jobs report below expectations, most likely due to lingering labour supply constraints, is not fully indicative of the underlying strength of the US economy, which for the month of May saw business confidence in the services sector rise to a record. In our view the April and May reports understate the conditions of the labor market, so it remains likely that job growth should be gaining momentum later this year. The possibility of a taper announcement by the Fed by year-end cannot be dismissed and investors should continue to look to the late-August Jackson Hole Symposium as the venue where taper talk should be starting in earnest. Against this backdrop risk-taking in markets resurfaced forcefully last week, with microcaps returning 1.3%, mega caps barely half that and some of the so-called meme stocks, the darlings of the retail crowd, going through wild gyrations suggestive of remarkable short-squeezes to come.
Unless Fed messages regarding the winding down of asset purchases become at some point particularly hawkish, which would run counter the purpose of their liquidity machinery aimed at keeping the economy and markets going, Powell’s taper talk should be enough to drive asset volatility, but not to upend the current bull market. This would be in keeping with US growth momentum being about to peak in the current quarter, an occurrence historically followed by more muted equity returns versus the previous phase when the expansion rate of the economy was accelerating. The large correction in bitcoin from the April highs could just be signalling this, a temporary collapse in risk appetite coinciding with a shift from expansion to slowdown in a still solidly growing US economy.
It would then follow that in the second half of the year we should see increased odds of EM stocks outperforming, taper talk notwithstanding and given relative valuations and that US GDP is projected to moderate considerably in Q4. If global growth ex-US holds up, fund flows will be headed towards the developing countries, which do not have large external imbalances as in 2013, the time of the so-called taper tantrum, when the Fed announced the intention to start cutting asset purchases and sent financial markets in a tailspin. Concerns about the performance of EM assets would be more justified in our view when the implementation of tapering draws closer, expected to take place sometime in the first half of next year. And if past intermarket relationships hold, a relative shift to non-US assets would imply a weaker dollar and possibly more gold strength. In summary, volatility caused by intensifying Fed taper talk this summer should be an opportunity to fade both dollar strength and EM weakness.
Fixed Income Update
The U.S. Treasury yields retreated to the lower end of their recent range on the backdrop of the U.S. jobs data missing consensus expectations. This macro data validates our standpoint on Fed's camp regarding asset tapering. The next important data point is the CPI print on Thursday, 10th June. Bloomberg estimates indicate the highest inflation print since 2008. However, that might not be enough to break the current range of the yields. Because even though Fed might start discussing Taper and change the press briefing tone in the June FOMC meeting, the labor market is still short of prepandemic levels by roughly 7 million jobs.
The Fed decided to sell the ETFs and single line securities it had bought during the pandemic under the Secondary Market Corporate Credit Facility in another significant news for the fixed income markets. The execution will start as early as 7th June. The total holdings under the program were only $13.7 Bn. But we believe that investors need not be concerned about the Fed's unwind. The markets are pretty supportive of credit with a record amount of issuance from High Yield issuers. What is more important is the powerful message which Fed had sent by directly intervening in the credit markets would endure in 2021. We did not see any major spread blowouts or panic post this announcement in our preferred High Yield and Emerging Market asset classes. These sectors were in the top quartile of the Fixed Income Asset class last week, generating +0.16% and +0.19%.
Flows into global fixed income funds picked up to +$12bn on the week. Both and I.G. and H.Y. flows turned positive, with Agg-type funds attracting 25% of the fund inflows. Emerging Market hard currency funds attracted more than $900mn. This year's global corporate default tally remains at 43, with no defaults for the second consecutive week. With less than half the number of defaults compared with this point in 2020, defaults have slowed considerably this year as creditworthiness is stabilizing even at the lower rating levels. In the U.S., 15 out of 19 sectors have default totals that are less than one-third of defaults in 2020 as the number of issuers rated 'CCC' and below has decreased from 2020 all-time highs. Additionally, negative bias (percentage of issuers with negative outlooks or ratings on CreditWatch with negative implications) across U.S. sectors has eased over the last few months.
MENA fixed income market performance was muted as the asset class underperformed the broader emerging market by 20 bps last week. The underperformance was driven by long-end spreads widening slightly for the I.G. sovereigns of the region. June is expected to be a solid primary issuance month after the break from large deals last week. Large sovereign-owned entities such as Qatar Petroleum and sovereigns including Bahrain are expected to tap the market this month.
The value rotation continued last week, along with a cyclical tilt, though ongoing stability in US yields led to a growth sector bounce back, end of the week. Reopening trades performed, with US domestic airports at 70/80% of pre COVID level and road traffic up as summer starts. Europe not far behind and Asia should see a Q3 pickup. Global automakers are seeing a pick-up in sales, though EV sales dominate. Whilst we remain overweight DM and EM equities, based on knockout EPS growth numbers for 2021 and 2022, to add to alpha we reiterate participation in the value/ cyclical rally though global financials, still on low valuations and strong earnings growth estimates. The UAE is our preferred bet to participate in the energy rally also still a value play. The real estate sector demand bounce back has broadened the recent performance of UAE equity indices, which had earlier been led by bank and telecon stocks. On global stock preference, we maintain buying quality companies with strong balance sheets at a reasonable price.
Global markets gained 0.75% last week, ytd we are at 11.6% total returns, with EM outperforming DM by a percent. European reopening post the strong vaccination drive, with improving PMIs specially in the service sector boosted the Eurostoxx 600 to new highs. US equities gained, with the S&P 500 ending the week at a record high and growth sectors such as tech in line with broader returns. The weaker than expected jobs additions eased concerns of a shift to tighter monetary policy. Growth-style equity sectors, however remain vulnerable to the possibility of rising rates. The S&P 500 has remained in a tight range recently, around the 4200 level, with economic optimism weighed down by uncertainty about rising inflation pressures. Central bankers maintain that inflation is transitory. While it's very early to say how inflation will play out, raw material prices have pulled back from the highs of early May and supply chains for intermediate goods like semiconductors are starting to improve. Margins remain resilient and at peak levels and whilst company guidance is for further margin growth, about 30% of S&P 500 companies have commented on margins growing at a slower pace. This is largely in the pharma sector where price increases are difficult to pass onto the consumer.
The biggest concern around inputs costs remains commodities with the recent rise in copper and energy prices. Copper and its electrification use case is also now a green mega theme and we have recently increased our coverage of copper producers. With Brent oil trading over $71, the global energy sector was up 5.5% for the week, with ytd gains of 32%. The push to being carbon neutral continues with oil companies facing activist interest and government directives. Total's rebranding into Total Energiesreinforces the company's investing in the energy transition, accelerating a shift to lower carbon and renewable power.
Some frothiness in the market as meme stocks favoured by retail investors saw large gains as illustrated by AMC’s incredible price performance following GameStop’s January frenzy. This is not a US phenomenon but mimicked across many other regions and raises concerns on leveraged trades that can see retail traders needing to unwind quickly if markets were to reverse direction.
Written By:Maurice Gravier Chief Investment Officer, [email protected]
Emirates NBD Bank PJSC (“Emirates NBD”) is licensed and regulated by the UAE Central Bank and this website aims at providing Internet users with information concerning Emirates NBD Private Banking, its products and activities. Persons having access to information made available by Emirates NBD on this website accept the following rules:
Emirates NBD uses reasonable efforts to obtain information from sources which it believes to be reliable, however Emirates NBD makes no representation that the information or opinions contained in publications on this website are accurate, reliable or complete. Published information may include data/information from stock exchanges and other sources from around the world and Emirates NBD does not guarantee the sequence, accuracy, completeness, or timeliness of information contained on this website provided thereto by unaffiliated third parties. Anyone proposing to rely on or use the information contained on this website should independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professionals or experts. Further, references to any financial instrument or investment product are not intended to imply that an actual trading market exists for such instrument or product. Emirates NBD is not acting in the capacity of a fiduciary or financial advisor. Any publications on this website are provided for informational purposes only and are not intended for trading purposes. Data/information provided herein is intended to serve for illustrative purposes and is not designed to initiate or conclude any transaction. The information available on this website 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. This website and anything contained herein, is provided "as is" and "as available," and that Emirates NBD makes no warranty of any kind, express or implied, as to this website, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.
The provision of certain data/information on this website is subject to the terms and conditions of other agreements to which Emirates NBD is a party. Emirates NBD reserves the right to make changes and additions to the information provided at any time without prior notice. The information may be modified or removed without prior notice. No buy or sell orders submitted via the internet or email will be accepted. In addition, the data/information contained on this website is prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors relevant to the determination of whether a particular investment activity is advisable.
Information contained on this website is believed by Emirates NBD to be accurate and true, in all material respects. Emirates NBD accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained on this website. Further Emirates NBD accepts no liability for the information and opinions published on the website and is under no obligation to remove outdated information from its website or to mark it clearly as such. The information given on this website may not be distributed or forwarded in whole or in part. Accordingly, anything to the contrary herein set forth notwithstanding, 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 the information available on this website 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. or (c) 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 the information on this website, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business. Emirates NBD expressly accepts no liability for losses or damages of any kind arising from using or accessing this website or links to third-party websites or from viewing information on any of its web pages. Furthermore, Emirates NBD accepts no liability for any unauthorized manipulation of users IT systems. Emirates NBD expressly draws user’s attention to the risk of viruses and the threat of hacker attacks
Third Party Website:
Users may be aware that Emirates NBD has no control whatsoever over third-party websites linked to or from this website and therefore accepts no liability for the content of such websites being correct, complete and legally valid for the products and services offered on such websites. Emirates NBD’s express written permission must always be sought before including a link to this website on a third-party website.
None of the information on this website in any way constitutes a solicitation, offer, opinion, or recommendation by Emirates NBD to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any security or investment.
The information contained on this website 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 on the website are 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. Undue 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. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized.
Risk: In addition, before entering into any transaction, the risks should be fully understood and a determination made as to whether a transaction is appropriate given the person’s investment objectives, financial and operational resources, experiences and other relevant circumstances. The obligations relating to a particular transaction (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk should be known as well as any regulatory requirements and restrictions applicable thereto. Data included on this website 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.
Investment in financial instruments involves risks and returns may vary. Before making such an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment.
The information on this website 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 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 at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties and you acknowledge that you have no ownership rights in and to any of such items. Except as specifically permitted in writing, the information provided in this website shall not be copied or make any use of any information on this website or any portion of the intellectual property rights connected with this website, or the names of any individual participant in, or contributor to, the content of this website, or any variations or derivatives thereof, for any purpose. Further you shall 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 or, except as otherwise provided with Emirates NBD’s prior written consent,
The information on this website solely for non-commercial use and benefit and the use of this information is not intended for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. Information contained in this website shall not be used, transferred, distributed, reproduced, published, displayed, modified, create derivative works from any data contained on this website or disposed of in any manner that could compete with the business interests of Emirates NBD. Any part of this website may not be offered for sale or distribute it over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet without the prior written consent of Emirates NBD. The information contained on this website may not be used to construct a database of any kind. The data on this website shall not be used in any way to improve the quality of any data sold or contributed by you to any third party.
In accessing this website, you acknowledge and agree that there are risks associated with investment activities. Moreover, you agree that your use of this publication is at your sole risk and acknowledge that the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described on this website and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with you.
Emirates NBD Bank (P.J.S.C.) is licensed by the Securities & Commodities Authority and subject to regulation, supervision and control of the Authority.
Head Office : Baniyas Road, Deira, PO Box 777, Dubai, UAE
Turbulence is not the end of the flight
How was your website experience today?
Subscribe and stay updated!
Get exclusive deals, latest promotions and important information
All this and more in the Emirates NBD newsletter
You are leaving the Emirates NBD Website
You will now be redirected to an external website to view this content. Emirates NBD or any of its subsidiaries does not bear liability/responsibility for any other information published by the website owner or publisher.
You will be redirected in 5 Seconds