July 07, 2017

DNCA's weekly market outlook by Igor de Maack

Management comment

The markets were once again caught off guard by a sudden rise in interest rates. The more hawkish and reflationary tone from central bankers also further steepened yields. The situation has become untenable in the European bond markets, where liquidity has dried-up as a result of the ECB repurchase programme. Investors are struggling to buy securities, particularly in the credit and high yield segments, triggering cries of “it’s a bid-only market” among the market-makers on the trading floors. Interest rates in the eurozone are clearly not coherent with regional economic momentum.

In the US, a 10% fall in auto sales sparked fears of slowdown in growth, while European composite June PMI indicators beat expectations across the board, with the exception of the UK. France came in at 56.6 vs a consensus forecast of 55.3, after 55.3 in May. Germany came in at 56.4 vs a consensus forecast of 56.1, after 56.1 in May, with the eurozone as a whole reporting 56.3 vs a consensus forecast of 55.7, after 55.7 in May. Investors, spooked by the prospect of chaotic monetary normalisation on all fronts, have therefore been obliged to review the cost of bond risk. Equity markets have logically come under short term pressure, with the banking sector nonetheless outperforming the broader market during the bearish phase.

Abraham Lincoln used to say “the best way to predict the future is to create it”. Investors on the long-term segment of the yield curve are perhaps currently abiding by this famous adage from the most illustrious of US presidents.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in July 7th, 2017.

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The markets were once again caught off guard by a sudden rise in interest rates. The more hawkish and reflationary tone from central bankers also further steepened yields. The situation has become untenable in the European bond markets, where liquidity has dried-up as a result of the ECB repurchase programme. Investors are struggling to buy...
2017-07-07