October 07, 2016

DNCA's weekly market outlook by Igor de Maack

Management comment

Market fears continued to feed off dithering by the central banks, forthcoming polls and the Brexit. Sterling slid further towards parity with the euro, while long-term rates came under pressure. It is worth noting that in spite of all these factors, the Italian treasury raised EUR 5 billion through a bond issue with 50-year maturity, yielding close to 2.85%, and the deal allegedly met with investor demand of EUR 18.5 billion! The bond nonetheless already lost three basis points in initial trading.

Meanwhile, a glimmer of hope has appeared on the macroeconomic horizon. The PMI-manufacturing indices have staged a recovery in most industrialised countries. After hitting a low point (50) at the beginning of the year, the global PMI manufacturing index is now close to 52, mainly due to overcapacity reduction coming to an end in China.  Among developed and/or highly digitalised economies, services now contribute the greatest proportion of GDP. However, the manufacturing industry still drains a high level of capital and investments, as is the case in the oil sector for example. Could this improvement in the industrial component therefore bolster global growth outlook and help ward off the spectre of a general decline in prices. Since the two major 2008-2011 crises, the themes of permanent global deflation and the inexorable decline of the European economy have dominated debates.

In the eurozone, although the inflation rate remains low (0.4% in September) it is at its highest rate since July 2014.
In the US, wage inflation is now discernible, while the core inflation rate is close to 2% (1.7%). With the recent rally in the price of crude, oil-producing countries (Russia, Brazil and Saudi Arabia) will find themselves with greater budgetary leeway once again. The oil majors, after massively scaling back capex, will now be able to resume investment in order to replenish their dwindling reserves. This virtuous inflationary spiral will undoubtedly take several years and it is based on the premise that there will be no major economic crisis in the meantime. However, just like in the 1980s, when no investor could imagine an inflation rate at 0% thirty years ahead, in 2016, many investors believe a resurgence of inflation to be a pipedream… 

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in October 7th, 2016.

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Market fears continued to feed off dithering by the central banks, forthcoming polls and the Brexit. Sterling slid further towards parity with the euro, while long-term rates came under pressure. It is worth noting that in spite of all these factors, the Italian treasury raised EUR 5 billion through a bond issue with 50-year maturity, yielding...
2016-10-07