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, 07.03.2021
Bad fundamental news are not what markets dislike the most: uncertainty is. The very same news which triggered last year’s Q4 rally, when market participants were overall very defensively positioned, shook markets last week with a significant rise in volatility.
The widely expected bounce in activity is apparently starting earlier than many expected. Control over the virus is improving, and signs of strength abound on the economy. PMI numbers were overall positive, with activity closing the Q4 gap, this time led by developed regions. The US job report was upbeat with twice more job creations than forecast, and China’s trade numbers were buoyant. Better growth prospects come with rising inflation, especially in energy and food, which gave a boost to the current relatively disorderly rise in interest rates, creating turbulences across all markets. The US 10-year Treasury yield closed at 1.57%, pressuring the fixed income sphere. Over the course of the week, equities were flat but volatile: up at the beginning of the week, down in the middle, and up again on Friday, sought after by dip buyers. Below the surface, the rotation continued with energy and financials replacing technology and healthcare as leaders. Oil prices ended the week on a firm note: the OPEC+ decided to keep output steady through April, and Saudi Arabia rolled over their discretionary 1mn barrels a day cut.
Volatility should not come as a surprise this year. Our stance is to stomach it and to stick on the fundamental picture. We see the rise in yields and inflation as logical but transitory, and think that the current levels of interest rates can be absorbed by equity multiples. The Fed is right to be patient, and we think we should be as well. Our positioning is unchanged, and our asset allocation committee is this Tuesday. Stay safe.
The current year started with strong hopes that the reflationary backdrop engineered by central banks and governments would be constructive for risk assets, and much less favorable for high-quality bonds. Yet, amidst a spiking-rate scare global equities have given up most of their year-to-date gains and the US dollar is on the offensive against expectations. The implicit and not-soinnocent assumption embedded in that plain-sailing scenario was that bond yield volatility would be wellbehaved and allow for a gentle Treasury bear market, while at the same time leave the case for the relative cheapness of risk assets versus government bonds unchallenged. We continue to hold the view that bond yields won’t undermine the conditions for the bull market to continue, although it remains likely that the tension between rising yields and elevated stock valuations could be resolved with a temporary equity setback. The main pillar underlying the constructive outlook is the combination of strong growth, plentiful liquidity and lack of persistent inflationary pressures, which we think mark this recovery. And should yields overshoot, we doubt the Fed would tolerate that.
In the end, how high yields will reach will depend on the Federal Reserve’s reaction function. Fed officials are minded to raise rates only when inflation has been for long enough above the target level, that is 2%, to gain conviction that price pressures have taken hold. Of course, long-dated Treasury yields rising too soon and too fast would be jeopardizing the chance for higher inflation further down the road. So, why didn’t Powell last week sound more explicit warnings, threatening to take specific action against rates marching higher? Simply because what has happened so far in the government bond camp is not extraordinary in a post-recessionary scenario, that is 10-year yields up 100bp, bang in line with historical averages. Powell’s now famous quote that he is ‘not even thinking about thinking about raising rates’ is conceptually not dissimilar to Draghi’s ‘whatever it takes’ in relation to rescuing the euro. The Fed chair is equally determined to pull all the stops to generate inflation, especially considering that he is acting in concert with Janet Yellen, who recently advised Congress to “go big” on stimulus. Should yields rise further and in a disorderly way, Fed officials would be reminding markets once more that a “whatever it takes” approach is in place and that tools are available for the Fed to control yields. Should moral suasion not be enough, yield control would become inevitable, but as an instrument of last resort, putting lots of Fed credibility at stake.
If real yields are capped, investors should not think twice about buying gold between $1,600 and 1,700/oz. Gold has now reached oversold levels as per our Gold Risk Appetite Indicator, that historically have coincided with buying opportunities. It will not be a walk in the park for the yellow metal to put in a bottom amidst the strongest growth resurgence since the Great Financial Crisis. But with Mr. Powell eventually leaning against spiking real yields, investors are more likely than not to be rewarded.
Fixed Income Update
Some investors compare the current tantrums in the US 10-year yields to a 10-year old child's demands. Chairman Powell acted like a strict parent last week, unwilling to bend down to the market players' whims. His comments make sense given the macro backdrop and still fragile growth. The FED has a dual mandate and, for the time being, focuses on employment where we can see a lot of slack. Even though the unemployment numbers dropped, the underemployed statistics still remain north of 11% in the US, and FED is clear that inflation upticks are not sustainable without low unemployment. We agree with Powell's views and believe it is better to keep some dry powder for a real crisis than to spend them to boost asset prices. The yields fell in line, and the 10-year failed to break the crucial 1%, and 30-year yields stayed below 2.40% despite the disappointment from the Chairman's remarks. We believe that a major part of current yield volatility is behind us, and if 10-year yields go near 2%, we would certainly be buyers of US Govt Debt at those levels and change our current stance from underweight to overweight the Govt bonds sub-sector.
The broader indices continued their weakness last week, with High Yield and Emerging Market Debt suffering to a lesser extent than Treasuries and Investment Grade Credit which lost more than 1% last week. We have seen spreads across subsectors inch up last week but don't think it is the start of a trend. Our view for the year remains that spreads grind lower from these levels in High Yield and Emerging Market Debt. However, we are cognizant that Emerging Markets remain at higher risk to the yield increases compared to High Yield partly due to the higher duration of EM sovereigns. Within Emerging Markets, LatAm continues to lag other regions due to the longer duration. Still, we believe with high beta to commodities; the current correction presents an attractive opportunity to invest in the region.
Mena region sovereigns' curves continued to be weak last week with bear flattening where the near-term yields increased more than the long-end in the IG space. On the contrary, in the High yield space, Oman outperformed both Egypt and Bahrain, bolstered by the latest news about multi-lateral syndication of a $2.2 Bn loan. Banks from the UAE, Kuwait, and the KSA participated along with international names. This showcases continued to GCC support to the country and improved investor comfort. Oman sovereign curve aggressively bullflattened, with the 30-year moving down by 15 bps. On Thursday, the Govt of Sharjah issued $1.25 Bn bonds spread across 12 and 30-year bonds with a skew towards the 12-year. We like the current spreads on the 12-year bond, which are trading slightly below par, and advise clients to take positions, and the adventurous players can opt for leverage to further boost their returns from the bond.
It was another volatile week for global equities, which surprisingly ended flat, with rising bond yields creating inflation concerns and high growth sectors with higher valuations i.e. technology and consumer continuing to sell off. Sectors that would benefit from an economic recovery are outperforming i.e. banking and energy stocks. Whilst the Nasdaq Index fell 2% last week, the S&P 500 +0.8% fared better as financials (higher yields), energy (on higher oil prices) and the materials sector (higher input costs and demand as manufacturing picks up) gained. Asian markets ended the week with Japan and India up and China down. Sovereign bonds sold off across the Eurozone but the EuroStoxx 600 was up a percent as it has a low weight to tech and the commodity heavy UK FTSE was up over 2.5%. The UAE saw both Dubai and Abu Dhabi Indices higher with banking continuing gains (we are overweight) and real estate rallying post Emaar Properties announcement of the planned merger of Emaar Malls.
With the $ 1.9 bn stimulus plan in the US approved, concerns have arisen that the large fiscal spending will boost not only economic growth but also consumer prices and inflation could go up and worries that the Fed could start to boost interest rates in the next two years. Fed officials have reiterated that the rise in yields reflects optimism about economic prospects and plan to keep monetary policy loose to support the economy for the foreseeable future. The US Dollar was stronger, adding to the impact on the US technology sector which has 60% revenue from overseas and EM equities which see lower inflows when the Dollar rises.
EV stocks which were 2020 darlings have given back part of last year’s astronomical gains and some are reaching attractive entry levels. ESG with a focus on clean energy and EVs is a compelling investment theme for us this year, however whilst the pure EV focused companies have been in the spotlight we think the incumbent auto leaders in Europe who are ramping up their EV models are more stable and their EV production will match Tesla’s in 2021 itself.
We remain overweight both the US and EM Asia. Consumers are saving more globally and there is plenty of cash on the side-lines thanks to lower spending during COVID lockdowns and government largesse. As per Bloomberg Economics the world’s larger economies have $2.9 tn in extra savings. We think the current yield tantrum is probably transient as growth and recovery in the world’s two largest economies is evident. China is targeting economic growth of over 6% this year. The US is seeing job growth, retail sales up and robust manufacturing numbers. The stimulus bill could push GDP above pre pandemic levels. The Fed’s Beige Book revealed the U.S. economy grew modestly at the start of the year, but leisure and hospitality were challenged by Covid-19 restrictions. Business travel in the decade prior to 2020 grew 5.1% p.a., however from April to December last year it fell by 80% in Europe and North America and 50% in Asia and the MEA. It may not ever reach earlier levels as the efficacy of video conferencing is well established. However, staycations are now the order of the day and domestic leisure air travel has picked up sharply globally
Written By:Maurice Gravier Chief Investment Officer, MauriceG@EmiratesNBD.com
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.
A spike in interest rates volatility
Setting the stage for a strong recovery
Little inflation and booming markets
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