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, 27.06.2021
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.
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.
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: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.
You can’t have it all, can you?
One surprise can conceal another
A broad pick-up in growth and inflation
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