June 30, 2017

DNCA's weekly market outlook by Igor de Maack

Management comment

Just like the summer migration of millions of European families, investors are also mobilising by selling equity markets which have become more volatile. The VIX index rallied to 11.7 vs 10 over previous weeks. One explanation for the increase in volatility stems from increased awareness among bond markets, which had once again been put to sleep by long-term rates returning to their excessively low levels last seen in November.

The idea that long-term rates should track the underlying macroeconomic trend and therefore steepen, was triggered by a more resolute speech from Mario Draghi, combined with higher-than-expected inflation in Germany and Japan, along with an uptick in global economic activity, including an upgrade in European growth forecasts and healthy manufacturing production data from China.

Following the recent Trump incertitude, further incertitude in the fixed-income markets has encouraged certain investors to lock-in their profits before heading for the Mediterranean beaches. Although the interim reporting season could inverse the bearish market trend, forex rates will have to be watched closely, as a strong euro is not good news for European exporters. Strangely however, inflow to European equities was positive for the fourteenth month in a row (USD 1.9bn).

In France, after the usual honeymoon phase, the new government is facing the harsh reality of economic data. Addicted to public debt, public deficits and public spending, France is still not respecting its European commitments and is even making less effort than some of its Southern European neighbours, which are in a much more precarious economic situation. Once again, taxation or the postponement of fiscal measures, designed to liberate the country’s energy and stimulate growth, could be used in an emergency to fill the gaps in the budget. After the recent array of “great again” slogans, notably “make America great again” and “make the planet great again”, France has to prepare itself for a much less joyous slogan, namely “make taxes great again”!

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in June 30th, 2017.

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Just like the summer migration of millions of European families, investors are also mobilising by selling equity markets which have become more volatile. The VIX index rallied to 11.7 vs 10 over previous weeks. One explanation for the increase in volatility stems from increased awareness among bond markets, which had once again been put to sleep...
2017-06-30