Goldilocks

Chief Investment Officer's team

30 May 2021

Economic growth confirms strength in the West but interest rates are not rising anymore…

AT A GLANCE

Economic growth confirms strength in the West but interest rates are not rising anymore…
… Painting a perfect “Goldilocks” picture for markets, which had another good week.
We however still expect volatility ahead and may consider reducing risk at some point.

Our last weekly publication titled about the limited risk of volatility contagion from the crypto complex to conventional asset classes. Indeed, while daily price action remained explosive for digital tokens, global markets had an unanimously positive week with, maybe more importantly, abating volatility. Data confirmed a surging US economy and a high probability for Europe to follow, but also rising price pressures with a US core PCE coming out above expectations. Markets did not take it negatively, as they also had well scripted speeches from central bank officials every single day. Their message is simple: inflation is transitory, support will remain considerable, but discussions about tapering will start soon and be transparently communicated to avoid any bad surprise.

We thus had a great week in terms of risk-adjusted returns. Interest rates went gently down, stocks added between 1.5% and 2.5% across regions, and an overall weaker US dollar supported commodities and emerging assets. What’s not to like about it?

Well, nothing, but it may look a bit too good to be true. Don’t get us wrong: we are constructive, and our scenario is unfolding. Having said that, we are not sure that interest rates have peaked already, given the vitality of growth and the imminent start of tapering talks at the Fed. Lower realized volatility doesn’t mean that risks have evaporated, but that they are considered benign by market participants. This, together with elevated valuations, could combine to create short term turbulence. We haven’t changed our positioning yet but may consider trimming our current overweight risk at some point. In the meantime, the week ahead will provide an avalanche of monthly economic data to get a more precise picture of the backdrop. Stay safe.

Cross-asset Update

The market reaction to yet another high US inflation reading was underwhelming, with the 10-year Treasury yield pulling back rather than backing up as one would have expected. Indeed, the personal consumption expenditures core price gauge, the inflation measure followed by the Fed, advanced well above expectations both on a monthly and yearly basis, but so did the CPI print for the same month of April. With the benefit of hindsight, we could dismiss the matter as a buy-the-rumour, sell-the-fact kind of response. After all, Fed officials continue to stick to their by now well-known script, whereby price pressures are seen as transient, so policy rates will be left untouched and longer-dated yields will be anchored and able to rise only so much. And the Fed will indeed not be easing anytime soon, minding more longer term expectations of price pressures, as indicated by the Fed Current Inflation Expectations Index, still hovering around a pretty subdued 2% reading, than the volatile gauges related to the cycle. Yet, the future direction of yields is for now not so much going to be a matter of policy, as of the liquidity provided to the system via Quantitative Easing. And since in the April FOMC minutes it was mentioned that it is appropriate to start to ‘talk of talking’ about the winding down of asset purchases, the stage is now set for the topic to be brought up at the June meeting again, with more clarifications coming most likely at the Jackson Hole Symposium.

The point is that investors are really not positioned for this kind of outlook. With yields range-bound since March and market-implied inflation rising relentlessly, real rates have collapsed and the 10-year Treasury real yield has retraced more than 50% of its year-to-date advance. US fixed income portfolio managers must have taken advantage of the higher yields, as their exposure to the US Aggregate Index, measured indirectly by the beta of their funds to that index, has risen to multi-year highs. This makes rates vulnerable to any kind of hawkish news flow that the market is absolutely unprepared for. The important data point to look at is the next payrolls release, due Friday. A stronger number would pull forward expectations of higher rates and reinforce the view that taper talk will intensify in summer. If this scenario comes to pass, then longer duration trades on gold and EM sovereign bonds should have limited upside and actually be due for some profit-taking. The euro has also been rising on an improved outlook and the potential for a slowdown in asset purchases to be signalled at the ECB June meeting. A strong US job report would on the contrary bring into sharper focus the limited ability of the ECB to follow the Fed on the path of policy normalization following years of failure to revive inflation.

Overall, the tailwind of the reduction of asset purchases could breathe some life back into the dollar, although we see the Fed ultimately doomed to deliver less than would be warranted due to the necessity for persistently negative real rates given the ever-growing federal debt burden. Hence, ultimately, the call on the longer term trend of the dollar cannot be that bullish.

Fixed Income Update

Fixed Income investors currently seem to be in a No Man's land. There is no clear trend in the direction of yields as market players await more data points to make up their minds. The May employment numbers are considered to be a key indicator, and all the high-frequency data suggest a strong labor market. But we anticipate that this might not be enough to move the needle for the US Treasury yields.

Meanwhile, May has been another record month for primary markets even though spreads continued to grind down. It was the busiest May for US High yield issuers and the fourth busiest month overall with almost $47 Bn of bonds priced. This is the indication of the amount of liquidity present in the system. Usage of the Federal Reserve's reverse repo facility surged on Thursday to an unprecedented $485.3 billion. This massive build-up of cash is partly due to the amount of bonds FED buys every month and has given rise to a debate about asset purchase taper timings. However, this may not be the top concern for FED to dial down its support compared to inflation and employment numbers. Across the Atlantic, ECB seems to be a similar boat with markets anticipating the central bank to extend its emergency bond-buying at the June meeting. According to a Bloomberg report, issuance of green, social, and sustainability debt, including bonds and loans, is on track to top $1 trillion this year after the market got off to a strong start in the first quarter.

The subsectors were in the green last week as spreads across the asset classes came down. All the spreads currently trade at their lowest point in a decade. Emerging Market and High Yield benchmarks had their best week in a month with +0.36% and +0.23% returns. Flows into global fixed income funds were roughly steady at +$6bn. Government-only funds, as well as both IG and HY credit funds, saw moderate net outflows. Net inflows into EM fixed income products picked up, led by hard currency. In another positive news for High Yield, this year's global corporate default tally remained at 43. So far, May 2021 has had only five defaults, the lowest number since August 2019, as many speculative-grade issuers see an uptick in positive rating actions. 'CCC' rated issuers have led upgrades by rating category in the first quarter of 2021 with 42, an all-time quarterly high. The 12-month trailing default rate has decreased to 4.8%.

GCC Debt returned +0.2% last week, which is lower than the broader Emerging Market returns as riskier parts of the Emerging Market performed better. We saw three issuers tapping the primary market last week as Abu Dhabi issued a seven-year bond and Mubadala issued dual-tranche 10 and 30-year bonds. Oman Arab Bank issued its first AT1 perpetual in the international markets in a sign that more and more first-time issuers are confident of drawing investor interests.

Equity Update

A good week for global equities, up 1.4%, with China, India and the UAE contributing to the stronger +2.4% Emerging Market performance. Asia is showing promising signs of a sustainable bounce. Developed markets, were up 1.3% for the week with US and European equity indices close to record levels. The S&P 500 is headed for a 4th consecutive month of gains, as is the Dow which celebrates its 125th year as a barometer of US stock sentiment. The rotation in the Dow’s composition reflects industrial progression in the US with a higher weight to industrials compared to the tech heavy S&P 500. The Nasdaq whilst up 7% lags the S&P 500 +12.6% year to date total returns as the rotation into cyclical/recovery sectors continues. We think financials have even more room for upside with valuations still very reasonable. The month of May looks likely to end well for most global markets after seeing intense volatility in equity, commodity, sovereign yields and cryptocurrency markets. Continued above trend growth in the second half of 2021 in addition to central banks who are unlikely to change monetary policy in a hurry, should help sustain equity gains into year end, albeit with volatile. Our overweight positioning for both DM and EM equities remains unchanged.

Equities have seen over half a trillion Dollars of inflows in 2021 so far, a record with a sizable chunk flowing into US equities. US exceptionalism continues as its economy is springs back to normalcy with restaurants, airlines and mobility indicators soaring, post the record vaccine roll out. The higher valuation is supported by a +50% Q1 earning growth (y/y) with an even higher number expected for Q2. Inflation worries continue, though margins are so far unaffected, as a surge in demand after Covid-19 restrictions were lifted, coupled with supply chain strains, which likely led to a rise in prices last month. Ecco data releases showed spending rose, the final read on May consumer sentiment was revised slightly higher, and Chicago manufacturing activity posted the highest level since the 1970s. We see this pattern flowing through to Europe, also high on vaccine rollout and reopening. This is also the case with the UAE where reopening has been reflected in the strong equity performance this year and a pickup in trading volumes. Economic data releases on PMI and a pick-up in residential sales are supportive of further gains in UAE real estate stocks backed by end user demand. Neighbouring countries such as the KSA easing travel restrictions should further boost retail spend.

Good results from Salesforce and Costco added to positive trading sentiment. However, the close to 50% fall in Bitcoin and Ethereum from their peak as well as a recurrence of high volume trading in momentum stocks such as GameStop and AMC increases liquidity concerns for leveraged retail investors. Environmental concerns around global warming have come to the forefront and Western oil producers Shell, Exxon and Chevron companies are under pressure from government and activist investors to cut carbon emissions. This reinforces our conviction on EV rollout and continued gains from the European and the US EV companies. In the 5G subsector we have identified telecom companies with strong growth, reasonable valuations which should provide upside as 5G rollouts accelerate.

Written by:

Anita Gupta Head of Equity Strategy , Anitag@EmiratesNBD.com
Giorgio Borelli Head of Asset Allocation , GiorgioB@EmiratesNBD.com
Maurice Gravier Chief Investment Officer , MauriceG@EmiratesNBD.com
Satyajit Singh Fixed Income Analyst , SatyajitSI@EmiratesNBD.com

Disclaimer

IMPORTANT INFORMATION

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.

Reliance

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.

Confidentiality

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.

Solicitation

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.

Liability

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.

Risk

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.

IMPORTANT INFORMATION ABOUT UNITED KINGDOM

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.

IMPORTANT INFORMATION ABOUT SINGAPORE

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 www.emiratesnbd.com.

IMPORTANT INFORMATION ABOUT EMIRATES NBD CAPITAL KSA CJSC

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.

more app

Auto Loans