the outlook brightens as political risks abate · 2019-06-23 · the outlook brightens as political...

Cross-Asset Weekly 12 May 2017

1 | Cross-Asset Weekly

The outlook brightens as political risks abate

The equity markets in the euro area continued their upward trend following the election of Macron as the next French president. We remain positive for euro area equity markets against US ones and bearish German Bunds against US Treasuries. The view of “Europe First” is reflected in our May forecast updates. We raised our year-end targets for European equity markets by 8-10%, as we discuss in our European Equities section. Our Macro forecasts remained fairly stable but with falling political risk, downside risks to the euro area have all been reduced. We continue to expect the ECB to change its forward guidance in June and announce a further reduction of its bond purchases in September, as highlighted in Monthly Forecast Update section. As we argue in the US Macro section, we believe slack in the US economy is substantially higher in the US economy than implied by the unemployment rate, which makes us more dovish than the markets in regard of the Fed. A cautious stance is also warranted by the policy tightening that is occurring in China. As shown in our Emerging Market section, de-leveraging and liquidity tightening has be-come the focal point for Chinese policy makers. The surge in onshore bond yields in China has both short term and long term implications for the performance of EM bonds. The Bank of England revealed its latest projections for growth and inflation in its May infla-tion report. Inflation was revised down significantly but growth for 2018 was revised up-ward. The BoE warned that in case of a soft Brexit rates could rise sooner and faster than currently priced by the market. In our UK rates section, we discuss the implications of this for the UK rates curve. We believe 10-year rates should increase. This week’s highlights

Monthly Forecast Update 2Solid expansion with fewer downside risks

US Macro 5How much slack persists in the labor market?

UK Rates 8Lower inflation but faster rate hikes with softer Brexit

European Equity Strategy 10What Macron means for European macro

Emerging Market (EM) Corporate Bonds 12Implications of China De-leveraging on EM Bonds

Economic Calendar 13Week of 15/05 – 19/05/2017

Market Performance 14Global Markets in Local Currencies

Contacts Dr. Karsten Junius, CFA Chief Economist [email protected] +41 58 317 32 79 Adolfo Laurenti Global Economist [email protected] +41 58 317 30 86 Ursina Kubli Forex Strategist [email protected] +41 58 317 32 80 Cédric Spahr, CFA Equity Strategist [email protected] +41 58 317 31 28 Dr. Florian Weber, CFA Fixed Income Strategist [email protected] +41 58 317 31 14 Emiliano Surballe, CFA Emerging Market Credit Strategist [email protected] +41 58 317 35 64 Kunal Singh, CFA Emerging Market Credit Strategist [email protected] +41 58 317 31 21 Thilina Hewage, CFA Emerging Market Credit Strategist [email protected] +65 6230 66 61



Monthly Forecast Update

Solid expansion with fewer downside risks

This month we revised our macro forecasts only slightly. We still see a solid ex-pansion of the world economy that is becoming more broadly based and does not rely on the US alone. Capacity utilization is increasing but is only very slowly lead-ing to higher wages and inflation. Central banks will therefore withdraw policy stimulus only carefully. We note that new political risks did not materialize so far.

Geopolitical risks were the major obstacle for many financial market participants. Given some unexpected events last year this is understandable. With the French presidential elections behind us and the new agreement of the Greek government with its creditors, we have to acknowledge that political risks so far have not materialized. Neither have we seen further major shifts towards more protectionist trade policies in the US – so far at least. Rather we note that trade is contributing to growth again – as indicated by the container throughput in Exhibit 1. The only thing to highlight is that the cyclical dy-namic and business confidence in the manufacturing sector is unlikely to increase from this point. Exhibit 1: A recovery of world trade is increasingly supporting global growth

Source: Datastream, J. Safra Sarasin, 10.05.2017

New JSS macro forecasts

Source: Datastream, J. Safra Sarasin, 10.05.2017

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2010 2010 2011 2012 2013 2014 2015 2016 2017

Global manufacturing PMI

Container throughput in % yoy (RHS)

2016 2017 2018US GDP 1.6 1.9 2.4

CPI 1.3 2.3 2.4Euroland GDP 1.7 1.7 1.6

CPI 0.2 1.8 1.6Switzerland GDP 1.3 1.4 1.5

CPI -0.4 0.5 0.5UK GDP 1.8 1.6 1.1

CPI 0.7 2.8 2.7Japan GDP 1.0 1.3 1.2

CPI -0.1 0.5 0.5China GDP 6.7 6.4 5.9

CPI 2.1 2.7 2.5

Dr. Karsten Junius, CFA Chief Economist [email protected] +41 58 317 32 79

Adolfo Laurenti Global Economist [email protected] +41 58 317 30 86

Forecast changes for 2017 GDP and CPI in the US and China as well as UK and Japa-nese CPI



We did not change our growth or inflation forecasts for the euro area or Switzerland. Growth is as solid as expected in both currency areas and will slowly contribute to im-provements in the labour market. As slack continues to be sizable particularly in the euro area it will take time to lead to higher wages and inflation rates. The risks around our European inflation forecasts have changed. While oil prices fell by more than 10% during the past month risks for food prices are clearly on the upside. The unexception-ally cold days in April are said to have destroyed large parts of some locally grown foods which is likely to be reflected in higher seasonal food prices in the coming months. One forecast change, we need to highlight: No further do we see a trigger for rate cut by the SNB as none of the political risks have materialized and the risk-off en-vironment lead to weaker CHF lately. Medium term we still consider that the interest rate differential towards the German bond and money market rates is too low to pre-vent a trend-appreciation. We kept our other policy rate and bond yield forecasts un-changed. We remain positive but cautious in assessing the US outlook. Growth disappointed in 1Q17 (+0.7% qoq annualized), and we marked down our 2017 accordingly. Confidence remains elevated both for consumer and business sector, and some recovery in capital expenditures bode well for the rest of the year, which we expect to bring back growth at about 2%. New Fixed Income and FX-Forecasts

Source: Bloomberg, Datastream, J. Safra Sarasin, 10.05.2017

Key Policy Rates 09-May-17 Jun-17 Sep-17 Dec-17

US Fed Funds 1.00 1.00 1.25 1.25EUR depo rate -0.40 -0.40 -0.40 -0.40CH 3m LIBOR target -0.75 -0.75 -0.75 -0.75BoE base rate 0.25 0.25 0.25 0.25JP O/N call rate -0.07 -0.10 -0.10 -0.10

Bond Yields (10yr benchmark)09-May-17 Jun-17 Sep-17 Dec-17

USA 2.41 2.45 2.60 2.75Germany 0.43 0.60 0.80 1.00Switzerland -0.03 0.05 0.20 0.35UK 1.14 1.50 1.75 2.00Japan 0.04 0.05 0.05 0.05

FX-Forecasts09-May-17 Jun-17 Sep-17 Dec-17

EUR - CHF 1.10 1.08 1.07 1.06EUR - USD 1.09 1.10 1.10 1.09EUR - GBP 0.84 0.85 0.85 0.86GBP - USD 1.29 1.29 1.29 1.27USD - JPY 114.0 111 113 115USD - CHF 1.01 0.98 0.97 0.97USD - CNY 6.91 6.90 6.90 6.90

We do not see a potential trigger for a SNB rate cut anymore

Growth in the US was weak in 1Q17, but it should improve for the rest of the year.

Broadly constant EUR-USD to be expected for the remainder of the year as recovery is gaining strength in the euro area while short term interest rates might increase further in the US



The global reflation narrative has suffered a setback in the most recent readings of consumer price inflation. While the outlook for the rest of the year has not materially changes, we had a few minor down-revisions for 2017 CPI in the United Kingdom, Ja-pan, and China. In part, the recent softness reflects the drop in oil prices in March and late April (see Exhibit 2). In one case, China, the inflation data show some anomaly as-sociated with the timing of the Chinese New Year, and partially conflict with both pro-ducer prices dynamics and other economic indicators. We have adjusted our China CPI forecast to 2.7% for the year, but we’ll watch closely for revisions in the published da-ta. In the case of China, better than expected growth in 1Q also drove a revision to ex-pected GDP for the year. Indicators such as the so called Li Keqiang index, which as-sess economic momentum based on electricity generation, bank loans and railway freight, continue to point to an expansion in coming months (see Exhibit 3). Optimism is somewhat countered by evidence of the tightening in financial conditions that mone-tary authorities have been implementing in recent months. This runs again expectations that the Chinese government would aim at a steady growth for the coming months, ahead of the crucial congress of the Communist party later this year. Apparently, the upside economic surprises in the winter make authorities confident enough to proceed at a cooling of credit markets despite the political calendar.

The global reflation story suffered a set-back, but it should resume on the back of a solid global growth

Chinese growth was better than expected, but a tightening of monetary and credit pol-icy points to some slowdown in future quarters

Exhibit 2: oil prices lose momentum Exhibit 3: China’s upside surprise

Source: J. Safra Sarasin, 12.05.2017 Source: J. Safra Sarasin, 12.05.2017

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Crude Oil, BrentU$/BBL

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2010 2011 2012 2013 2014 2015 2017

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US Macro

How much slack persists in the labor market?

The current unemployment rate of 4.4% likely underestimates the number of the unemployed. In our estimates, up to 2.2 million workers are considered as out of the workforce, but they would very likely start searching for jobs as the labor mar-ket improves further. Our calculations do not support the current narrative about the labor market being at full employment.

The narrative that supports the hawkish turn by the Federal Reserve in recent months revolves around the improving economic outlook for the global economy as well as the firming of inflation in the United States. Going forward, as the rationale goes, we should expect additional pressure on the price level stemming from the tight labor mar-ket, which is now close to, if not already at full employment. With the unemployment rate at 4.4%, an escalation in wages and salaries should follow soon and, according to this view, the Fed should act timely to cool down the economy and to counter an un-controlled rise in inflation. The problem with this narrative is that there is very little evidence of any acceleration in wages and salaries in the pipeline. Average hourly earnings grow at 2.5% yoy, about the same level as in late 2015. Once inflation is taken into account, real wages are grow-ing well below 1%, a pace that is unlikely to add much upward pressure to prices. The last time the unemployment rate was at the current low level was in 2007, and back then hourly wages were growing at 4.4% (see Exhibit 1). This comparison shows the contradiction between the subdue compensation dynamics and the low unemployment rate, which should already be below what is considered its long-term “natural” rate. The resulting puzzle is a crucial problem for the Federal Reserve. Are wages indeed on the verge of a brisk acceleration? Or is the actual unemployment rate understated? How much slack is left in the labor market? This investigation is complicated by the shifting demographics of the labor force. By inspecting indicators such as the labor force participation rate of the employment-to-population ratio (see Exhibit 2), one might be tempted to conclude that there is still some way to go before the economy will re-turn to levels of participation and employment last seen in the early 2000s.

Adolfo Laurenti Global Economist [email protected] +41 58 317 30 86

A tight labor market close to full employ-ment is one reason that may trigger the Fed to hike rates in June

Muted gains in wages and salaries suggest that the slack in the labor market might be greater than shown in official data

The participation rate and the employment-to-population ratio have not fully returned to their pre-crisis level

Exhibit 1: Stagnant wage dynamics are out of synch with the fall-ing unemployment rate

Exhibit 2: Only a partial recovery in the labor force participationrate and the employment/population ratio

Source: Datastream, J. Safra Sarasin, 11.05.2017 Source: Datastream, J. Safra Sarasin, 11.05.2017

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2000 2002 2005 2008 2011 2014 2017

UnemploymentrateHourly earnings, %yoy (RHS)

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2000 2002 2005 2008 2011 2014 2017

Participation rate

Employment/populationratio (RHS)



Unfortunately, this interpretation is not entirely correct, as the drop in participation re-flects both the slack in the labor market and the ageing of the US population. For in-stance, the number of people of age 55 or over rose by more than 31 million between 2000 and 2016. Thus, a correct assessment of the degree of slack in the labor market must disentangle these two factors. A more accurate explanation should take into ac-count the available data about population cohorts and participation rates by age groups, in order to calculate some counterfactual estimates of overall labor force par-ticipation and unemployment rates. The question we ask is, what would be the partici-pation rate if we consider the ageing of the workforce, but impose the assumption that, for each age bracket, the participation rate remains at the same levels as in 2000-2007? Two long-term trends should be recognised (see Exhibit 3). On the one hand, there has been a steady decline in the participation rate of the younger cohort (age 16-24), which is in part driven by higher enrolment rates in secondary and college-level education. On the other, the participation rate of the older cohort (age 55 and over) has risen, reflect-ing longevity, improving health, a shift toward a service-based economy, and, since the Great Recession, the damage to savings and financial investments which forced many people to delay retirement. But what about the age groups 25-54 (see Exhibit 4) – people of working age, who would be expected to be active participants in the workforce? They show relatively high participation rates (above 80%), in line with expectations, yet the participation of these age groups suffered declines, during the economic downturn, that remain to be fully re-covered. If the participation rate had held steady at the 2000-2007 levels, many of these missing workers would be counted as unemployed, rather that excluded by the calculation. An estimation based on this counterfactual assumption helps to derive an alternative participation rate (see Exhibit 5), which accounts for the ageing of the workforce. The difference between this alternative measure (63.8%) and the official participation rate (62.9%) can be interpreted as an estimate of the number of people currently out of the work force, but who might be expected to return to the market looking for a job if labor market conditions improve further.

The US workforce is ageing, and de-mographics is an important factor in as-sessing labor market conditions

Compared with the past, more younger people are in school, and more elder work-ers remain in the workforce

The participation rate dropped for people in the age group 25-54, and demographics is not an explanation

Adjusting for demographics, the overall participation rate should be higher than the current actual level

Exhibit 3: Participation rates for the younger and older cohorts Exhibit 4: Participation rate for selected age groups age 25-54


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1990 1994 1998 2003 2007 2012 2016

16-24 years

55 years and over (RHS)

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1990 1995 2000 2005 2010 2015

25-34 years 35-44 years 45-54 years



We estimate that there are 2.3 million people in this group, and 2.1 million in the criti-cal age group of 25-54. This estimate is greater than the official number of “discour-aged workers” (i.e. people who did not look for a job during the last year) reported by the Bureau of Labor Statistics (which was 455,000 in April.) Including people consid-ered as “marginally attached to the workforce” (i.e. they did not look for a job during the last four weeks), official figures comes to 1.5 million people, still below our esti-mates. This analysis might also cast light about the current level of the unemployment rate. If the “missing workers” we estimated in our counter-factual analysis were counted as “unemployed” rather than “out of the workforce”, the resulting unemployment rate would come at 6.1%, instead of the 4.4% reported in the official figures (see Exhibit 6). Our estimates would also be higher than most alternative measures of labor underutili-zation, but lower than the broadest indicator provided by the Bureau of Labor Statistics, the so called U-6 rate, which includes part-time workers for economic reasons, current-ly at 8.6%. Conclusion We believe that current measures of slack in the labor market tend to underestimate the number of workers that are unemployed by considering them as being out of the workforce. As a result, we think that there are about 2 million people who could return to the workforce and start searching for a job as the labor market continues to im-prove. This could be a partial explanation for why the unemployment rate has continued to drop well below 5% without resulting in stronger gains in hourly wages.

Up to 2.2 million people might return to the workforce if economic conditions im-prove further

The unemployment rate might be underes-timated, and closer to 6%

Our counterfactual estimates suggest that more slack persists in the labor market than captured by official statistics

Exhibit 5: Demographics impact on the participation rate Exhibit 6: An alternative estimate of the unemployment rate


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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Actual labor force participation rate

Demographic-adjusted labor force participation rate

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2008 2009 2011 2012 2013 2015 2016

Participation-adjustedunemployment rate

Actual unemployment rate



UK Rates

Lower inflation but faster rate hikes with softer Brexit

The Bank of England revised down its inflation projections in the May inflation re-port significantly for 2018 and 2019. The Bank also highlighted it could raise rates sooner and faster than currently priced by the market in case of a soft Brex-it. We disagree with the sooner part but agree with the faster one. This should lead to a steeper 2s10s curve and higher 10-year rates in the UK.

The Bank of England (BoE, Bank) published its May inflation report yesterday. In the re-port, the Bank revised down its inflation projection significantly relative to the February report (see Exhibit 1). Assuming an unchanged policy rate over the forecast horizon, the Bank expects inflation to peak at 2.8% by year-end 2017. Afterwards inflation is expected to gradually fall to 2.2% in Q2 2019. In 2019 and 2020, the Bank believes that stronger domestic inflation driven by significantly higher wage growth will drive in-flation upwards. We remain sceptical of this assumption. Our scepticism is based on our more cautious GDP expectation for the UK in 2018. While we expect the UK to growth at only 1.1% YoY in 2018 (for details please see our Forecast Revisions section), the Bank of England expects the UK to growth at 1.7% YoY in 2018. The 2018 GDP growth was in fact revised upwards. For 2017, the BoE revised down the YoY GDP growth in each quarter (see Exhibit 2). However, the BoE based its projections on a smooth Brexit, which introduces an asymmetric risk to their forecast.

Governor Carney also indicated that in case of soft Brexit, the Bank of England could raise rates sooner and faster than currently priced by the market. The market is cur-rently pricing a very gradual increase in rates for the UK. It is also pricing that the hik-ing cycle in the UK is slower than the ECB’s (see Exhibit 3). We doubt that the BoE can raise sooner. We still expect the BoE to remain on hold during the Brexit negotiations. Although we expect the snap-election to give PM May a large enough majority to com-promise during the negotiations. Game theory and the experience of sovereign debt cri-sis however suggest that compromises only emerge at the eleventh hours. This means the BoE won’t know for some time whether we get a hard or soft Brexit. However, since we expect a deal with a transition period, we agree with the faster part and expect faster hikes than currently priced. This should lead to a steeper 2s10s curve in the UK and also to higher 10-year rates.

Dr. Florian Weber, CFA Fixed Income Strategist [email protected] +41 58 317 31 14

Inflation revised down significantly

Despite downward GDP revisions for 2017, BoE GDP expectation remains high for 2018

Exhibit 1: UK inflation is expected to peak sooner and fall fastertowards 2% in the May inflation report

Exhibit 2: The YoY GDP in each quarter in 2017 has been reviseddown markedly

Source: Bank of England, J. Safra Sarasin, 11.05.2017 Source: Bank of England, J. Safra Sarasin, 11.05.2017

Softer Brexit could lead to faster hikes

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Exhibit 3: Faster hikes in case of a softer Brexit should lead to a steeper 2s10s curve

Source: Bloomberg, J. Safra Sarasin, 11.05.2017

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European Equity Strategy

What Macron means for European macro

Macron’s victory for the French presidency generates expectations of at least some reforms in France.

The global cycle is probably peaking in 2Q17, yet this does not mean that a fall-back into stagnation will follow.

Even if some deceleration takes shape in China, European economies should keep enjoying stable growth in 2H17.

The European equity markets rally should last into year-end, yet could pause during the summer period starting early June.

European equity markets treaded water this week after the widely anticipated election of Emmanuel Macron as new French president. They have finished climbing the tradi-tional “wall of worry” that they faced last summer. European protest parties failed to seize power in 2017 and political risk is now priced out. Many investors wonder if a slow-moving US economic reform process and a possible growth slowdown in China warrant staying in the market. We expect the economic expansion to continue in com-ing months and the uptrend in European equity markets to last into end 2017. European economies enjoy more than a little cyclical sunshine. German 1Q17 GDP grew 0.6% compared with the past quarter, which corresponds to an annualized QoQ rate of 2.6%. Manufacturing surveys in Germany, France, Spain and Italy are running high while consumer demand looks especially robust in Germany and Spain while im-proving in France. As long as the oil price does not spike substantially above USD 50/barrel, the risk of an adverse shock looks modest for European growth. This is the main reason why we raised our year end targets for the Euro Stoxx 50 from 3’600 to 3’850, for the Dax from 12’500 to 13’500 and for the SMI from 8’700 to 9’500. We consider with caution the prospect of a five year Macron presidency and anticipate the path of economic reforms will prove arduous for the new president. Having said that, Macron has scope to deliver some positive surprises till end 2017:

We expect his new party “La République en marche” to emerge as the strong-est fraction in the French “Assemblée Nationale” from the June parliamentary election, closely followed by the centre-right party “Les Républicains”.

Macron is thus likely to build a stable coalition government around his new party by integrating some centre-right, socialists and green politicians. He en-joys political momentum and many left and right heavyweights will probably join him out of conviction or sheer opportunism.

Some long overdue reforms including labour market reforms and a more flexi-ble work week, a cutback of company taxes and a general reduction of red tape for small businesses might generate better results than many expect as the French economy is currently expanding.

The likely stiff resistance of far-left and far-right opposition parties in the street should not prevent Macron from enforcing some urgent reforms which are “low hanging fruits” in a country chronically paralyzed by overregulation.

Implementing reforms when an economy is growing is generally easier than during a recession. Macron is unlikely to repeat the mistakes of Sarkozy and

Cédric Spahr, CFA Equity Strategist [email protected] +41 58 317 31 28

Equities have climbed a “wall of worry” since June 2016, yet the uptrend is not over

European growth is resilient

While avoiding the trap of “Macron exu-berance”, some reforms are still likely



Hollande by flip-flopping with reforms. Macron already hinted he would not shy away from using Article 49.3 of the Constitution, which turns a vote on a new law into a vote of confidence for the government.

Last but not least, Macron is expected to extract some concessions from Germany regarding French deficits and / or investment plans if they go along with genuine reforms. A failure of Macron would present Germany with the un-palatable prospect of a far-left or far-right candidate being elected in 2022.

The equity market glass remains clearly more than half-full. Chinese growth appears poised to decelerate only slightly. If needed, a fresh injection of bank credit would give another boost to Chinese growth. We expect a reacceleration of US growth in 2Q17. A Fed rate hike in June would raise the spectre of a policy mistake, though market reac-tion is likely to hinge on the way the rate hike is communicated. European equity market sentiment is currently elevated and some buying fatigue might set in. A period of consolidation starting ahead or during the French parliamentary elec-tion would not constitute a surprise. Seasonality in summer months tends to usher in periods of lull or smaller corrections lasting into late September. We thus stick to our “buy the dip” strategy, confident that we have a solid medium-term uptrend till end 2017 and that periods of weakness will provide buying opportunities.

Global risks including China and the Fed remain moderate

Sentiment and seasonality foretell a likely consolidation starting in June

Exhibit 1: Inflation expectations remain at levels compatible withfurther gains in equities in spite of recent commodity weakness

Exhibit 2: Strong activity surveys are likely to keep driving highearnings revisions for European equities in coming months.

Sources: Datastream, J. Safra Sarasin, 12.05.2017 Source: Datastream, J. Safra Sarasin, 12.05.2017

Exhibit 3: Stock index targets

Source: J. Safra Sarasin, 12.05.2017

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Ifo indexDJ Europe 600 net earnings revisions (rhs)

USA 11.05.2017 P/E ratio Dec 17 Dec 18S&P 500 2'394 17.6 2'500 2'600Nasdaq 100 5'674 24.7 5'800 6'100

EuropeFTSE 100 7'387 15.4 7'600 8'200DJ Euro Stoxx 50 3'624 15.1 3'850 4'200DAX 12'711 14.0 13'500 15'000SMI 9'065 16.9 9'500 10'000SPI 10'291 18.1 11'000 12'000SMIM (Mid-Caps) 2'363 18.9 2'450 2'600

JapanNikkei 225 19'962 15.1 20'500 22'000

Emerging MarketsMSCI EM 1'000 13.0 1'100 1'200



Emerging Market (EM) Corporate Bonds

Implications of China De-leveraging on EM Bonds

The surge in onshore bond yields in China has both short term and long term im-plications for the performance of EM bonds. The near term risk of supply indiges-tion is outweighed by the long term benefits of a stable Chinese economy.

In recent weeks, de-leveraging and liquidity tightening has become the focal point for Chinese policy makers. New measures have been introduced to reduce leverage in var-ious parts of the financial system and to bring in controls over the unregulated shadow banking assets (such as wealth management products). The growth in the shadow banking sector has introduced significant risks to financial stability in China. Tighter regulations have resulted in a spike in onshore bond yields and credit spreads (Exhibit 1). In this note we briefly discuss the impact of these developments on EM bonds. In the near term, higher onshore yields may encourage Chinese corporates to issue bonds in the offshore USD market to meet their funding needs. The market has already witnessed a surge in supply from China in 2017. Chinese companies have issued $76bn of new bonds in 2017 compared to $108bn in full year 2016. New issues from China account for 45% of total EM corporate bond supply so far this year. Further in-crease in bond supply from China may potentially lead to supply indigestion and as a consequence wider credit spreads. Strong local investor support for Asian USD new is-sues may help to mitigate the risk of increased supply. For instance, Asian investors bought 84% of Asian new issues in 2Q17, up from 76% in 1Q17. In our view, the new regulations are a long term positive, even though their success may come at the expense of near-term growth. Stability in the banking sector and po-tential decline in the role of shadow banking in the economy should materially reduce the risk of financial instability in the long run. A stable Chinese economy is pivotal for the broader economic outlook of EM economies. Furthermore, China account for 20% of EM corporate bond universe, highlighting its importance for the performance of the as-set class. Therefore, the short term risk of supply indigestion is outweighed by the long term benefits of the new de-leveraging regulations.

Thilina Hewage, CFA Emerging Market Credit Strategist [email protected] +65 6230 6661

Bond yields in the onshore market have risen due to tighter regulatory framework

The market may see higher supply from Chinese corporates in the USD market

The improved stability in the financial sys-tem could anchor the performance of EM bonds in the long run

Exhibit 1: Trends in Govt bond yields and credit spreads Exhibit 2: China’s contribution to EM and Asia new issue supply

Source: Bloomberg, J. Safra Sarasin, 09.05.2017 Source: JP Morgan, J. Safra Sarasin, 09.05.2017

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Economic Calendar

Week of 15/05 – 19/05/2017

Country Time Item Date Unit Consensus

Forecast Prev.

Monday, 15.05.2017 CN 04:00 Retail Sales Apr yoy +10.9%+10.9% 04:00 Industrial Production Apr yoy +7.0% +7.6%CH 09:15 Producer & Import Prices Apr mom - +0.1% 09:15 Producer & Import Prices Apr yoy - +1.3% 10:00 Domestic Sight Deposits May 12 CHF bn - 480.5US 14:30 Empire Manufacturing May index 6.0 5.2 16:00 NAHB Housing Market Index May index 68.0 68.0

Tuesday, 16.05.2017 EMU 08:00 New Car Registrations Apr mom -+11.2% 11:00 GDP, prel. 1Q17 yoy - +1.7% 11:00 ZEW Expectations May index - 26.3DE 11:00 ZEW Expectations May index - 19.5US 14:30 Housing Starts Apr 1 000 1250 1215 14:30 Building Permits Apr 1 000 1270 1260 15:15 Manufacturing Production Apr mom - -0.4%

Wednesday, 17.05.2017 EMU 11:00 Construction Output Mar yoy - +7.1% 11:00 CPI Apr mom - +0.8%

Thursday, 18.05.2017 US 14:30 Initial Jobless Claims May 13 1 000 - - 14:30 Continuing Claims May 6 1 000 - - 14:30 Philadelphia Fed Business Outl. May index 19.4 22.0

Friday, 19.05.2017 EMU 10:00 Current Account Mar EUR bn - 37.9DE 08:00 PPI Apr yoy - +3.1%

Source: Bloomberg, J. Safra Sarasin



Market Performance

Global Markets in Local Currencies

Government Bonds Current value Δ 1W Δ YTD TR YTD in %

Swiss Eidgenosse 10 year (%) -0.05 0 14 -0.7

German Bund 10 year (%) 0.41 -1 20 -1.2

UK Gilt 10 year (%) 1.14 2 -10 1.5

US Treasury 10 year (%) 2.37 2 -7 1.4

French OAT - Bund, spread (bp) 45 2 -3

Italian BTP - Bund, spread (bp) 186 11 25

Spread over govt bonds

Change in credit spread Credit in-

dex

Credit Markets (bp) Δ 1W Δ YTD TR YTD in %

US Investment grade corp. bonds 62 0 5 2.0

EU Investment grade corp. bonds 63 0 10 0.4

US High yield bonds 327 -1 27 4.4

EU High yield bonds 257 -1 31 2.9

Stock Markets Level P/E ratio 1W TR in % TR YTD in %

SMI - Switzerland 9 072 18.1 1.4 13.8

DAX - Germany 12 725 14.0 0.5 10.7

MIB - Italy 21 543 15.0 1.5 12.5

IBEX - Spain 10 883 15.2 -1.3 17.7

DJ Euro Stoxx 50 - Eurozone 3 623 15.4 0.2 11.9

FTSE 100 - UK 7 403 15.1 2.1 5.1

S&P 500 - USA 2 394 18.5 0.3 7.7

Nasdaq 100 - USA 5 674 21.2 0.9 17.2

Nikkei 225 - Japan 19 884 17.4 3.4 5.3

MSCI Emerging Markets 1 000 12.8 2.1 16.6

Forex - Crossrates Level 3M implied volatility

1W in % YTD in %

USD-CHF 1.01 6.3 2.0 -1.1

EUR-CHF 1.09 4.6 0.8 2.1

GBP-CHF 1.30 6.2 1.1 3.0

EUR-USD 1.09 6.7 -1.2 3.3

GBP-USD 1.29 6.9 -0.9 4.2

USD-JPY 113.6 8.6 0.8 -2.9

EUR-GBP 0.84 6.7 -0.3 -1.1

EUR-SEK 9.66 5.5 -0.2 0.8

EUR-NOK 9.34 7.3 -1.2 2.7

Commodities Level 3M realised

volatility 1W in % YTD in %

CRB Commodity Index 425 5.7 2.7 0.3

Brent crude oil - USD / barrel 50 25.8 2.8 -9.3

Gold bullion - USD / Troy ounce 1 229 9.8 0.1 7.1

Source: J. Safra Sarasin, Bloomberg


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the outlook brightens as political risks abate · 2019-06-23 · the outlook brightens as political...

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