Elections, Global Growth & Inflation. Interconnections on the markets.

1. EDITORIAL

As analysed by Kepler Chevreux in their analysis, “since the fear of political disruption in France has been almost entirely removed the immediate positive impact of a Macron Presidency will be priced almost instantly.

A major obstacle to the extension of the bull market in European equity has been removed.

Gains of the order of 5% for regional benchmarks from this point to late-May are plausible. There should be an expectation to see new highs for the S&P500 above the 2400 threshold during this period. An anticipation that “sell-in-May” profit-taking later next month will signal a phase of market consolidation through June. The investment climate should allow equities to register further gains through the summer quarter. A “fully-invested” portfolio position should be a good move”, otherwise an eye on the volatility as usual should be kept on as this bullish market has compressed the volatility index at a very low level (see figure 1).

Figure 1: VIX (Blue) & V2X (Green) Indices

“There are three major considerations in this respect. The first influence is the growth paradox. Despite the perception of high political risk and economic policy uncertainty in Europe since last summer the macro-economic data from the region has delivered positive surprises for activity almost continuously since that time.

The general economic context in the EZ at this time would seem to be the most favourable since the beginning of the decade. The French economy exemplifies the paradox of this period. It is a mini-revival within the recovery of the EZ. It seems reasonable to assume that by September the ECB will be ready to announce the first stage of the gradual withdrawal of its QE programme.

The second consideration is that the investment consensus wants to be positive about European equity. Retail fund flows into the region’s equity markets have become consistently favourable, thanks in large part to the growth surprise. American funds are returning to the region. We have to know when not to resist the investment consensus. This is one of those occasions. Accordingly, we think that Europe’s equity markets should deliver finally a degree of out-performance relative to the American benchmark from a tactical perspective over the next six months.

In the third place, France’s election campaign has intervened in a financial context characterised by the gradual correction of the revival of higher risk equity value. An assumption made before of the correction that should be complete by the end of May was very strong in the past, but the election can abbreviate this period.

It is plausible to think that the election is the catalyst that marks the end of this phase of consolidation-correction, whose barometer is the adjustment of yields of secure debt. The French catalyst should arrest the out-performance of the category of globally-exposed stocks in Europe at this time, to the advantage of value relative to the growth style. In this respect our argument of “peak US$ in 2017” is becoming gradually more plausible.

In the figure 2, we are showing the AAII Bull/Bear Index that shows the allocation of the Investors that even though the bullish mood is on, the index is on a caution territory toward a bearish sentiment.

Figure 2: AAII Bull/Bear Index of Investor Sentiment [USA]

Another view from Schroders, is that “strong momentum from the end of last year is carrying over into 2017 in the US, Europe and Japan. Growth is also firming in the BRIC economies with China upgraded to 6.6% and our global growth forecast has been nudged higher for 2017 to 2.9% (previously 2.8%). For 2018 the growth forecast is unchanged at 3% as modest improvements in the BRICs, Japan and the UK are offset by a downgrade to the US, where we have scaled back our expectations for fiscal expansion.

The revival in global activity in the second half of last year was largely driven by a combination of stronger consumer spending and an inventory cycle. Going forward we expect these factors will fade. In the US, the inventory building cycle which has been helpful to manufacturing and trade will probably persist in Q1, but thereafter inventories are likely to be in better balance with output, resulting in slower growth. On the consumer side, rising inflation is eroding real incomes and reducing spending.

Figure 3: Growth & Inflation

While we expect a gradual increase in wage inflation over the forecast period, this is not enough to prevent a slowdown in real income growth later in the year. Over in the emerging world, we continue to expect as much stimulus (largely fiscal) by the Chinese authorities as is needed to keep growth on target and provide President Xi with the political capital he needs heading into the 19th National Party Congress.

In contrast, the growth outlook on India has been trimmed as we are seeing some negative impact from the demonetisation policy enacted last year. In comparison, the stronger profile for the US and higher commodity prices helps support growth in Brazil and Russia.
Meanwhile, inflation is rising and we have revised up our global forecast for 2017 to 2.7% (previously 2.4%) following 2% in 2016. The driver is the base effects from commodity prices which are feeding through into producer and consumer prices.

In 2018, oil prices are expected to stabilise, with the result that inflation moderates to 2.3%. Hence the increase in inflation is not sustained. The exception to this is in the US where we see core inflation rising throughout the forecast period.

In terms of monetary policy, we continue to expect the theme of divergent monetary policy to play out with the Fed expected to raise rates to 1.50% by the end of 2017. US rates are then expected to reach 2.25% by the year-end of 2018. However, interest rates elsewhere are expected to remain on hold reflecting the earlier stage of the cycle in Europe and Asia.

We expect the ECB will continue quantitative easing over the forecast period but will begin to taper again in 2018. The BoJ is expected to keep rates on hold, but maintain qualitative and quantitative easing (QQE) to keep the 10-year JGB yield close to zero.

In China interest rates are expected to fall further, but by less than previously expected in 2017 following recent moves by the central bank.”

Cristian Rusconi

2. DATA TO WATCH

US

• 03th May: MBA Mortgage Applications
• 03th May: ADP Employment Change
• 03th May: MArkit US Services PMI & US Composite PMI
• 04th May: Trade Balance
• 04th May: Initial & Continuing Jobless Claims
• 08th May: NFIB small business Optimism
• 10th May: Crude Oil Inventories
• 11th May: PPI Final Demand MoM & YoY
• 12th May: CPI MoM & YoY
• 12th May: Retail Sales Advance MoM
• 12th May: University of Michigan Sentiment
• 15th May: NAHB Housing Market Index
• 16th May: Industrial Production MoM & Capacity Utilization

EU

• 03th May: PPI MoM & YoY [EZ] & GDP SA QoQ & SA YoY [EZ]
• 04th May: Markit Services PMI & Composite PMI [SPA, ITA, FRA, GER, UK & EZ]
• 04th May: Retail Sales MoM & YoY [EZ]
• 05th May: Markit Retail PMI [GER, FRA,ITA & EZ]
• 09th May: Industrial Production SA MoM & WDA YoY [GER]
• 09th May: Industrial Production SA MoM & WDA YoY [FRA & ITA]
• 09th May: Industrial Production SA MoM & WDA YoY [UK]
• 12th May: CPI MoM & YoY [GER] & GDP SA QoQ & WDA YoY [GER]
• 12th May: Industrial Production SA MoM & WDA YoY [EZ]
• 16th May: CPI MoM & YoY [FRA & UK] & PPI Output MoM & YoY [UK]
• 17th May: CPI MoM & YoY [EZ]
• 17th May: Unemployment Rate [UK]
• 19th May: Consumer Confidence [EZ]

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