Find anything about our products, search our faqs, and more.
Type your query in the search above and press enter to see the results
Try typing "Card activation"
Chief Investment Officer's team, 18.04.2021
It was an eventful week on many fronts, with stocks, bonds and commodities registering positive returns, China on a slowdown path, the US economy turbocharged, yet long-dated Treasury yields falling, and both Fed and ECB officials making hints to the future unwinding of asset purchase programs. Developed market stocks gained 1.5% and their emerging peers were not far behind. The yield on the US 10-year note lost 8bps, now below 1.6%. Gold broke above $1,750, Brent crude rose by 6% and the US dollar fell back to mid-March levels.
This was indeed a perfect week for investors. On the economic front, data confirmed that the US didn’t wait for full vaccination to rebound. Retail sales, industrial production and sentiment indices were all better than forecast, while initial jobless claims were lower. As Consumer Price Index came out at its largest increase in over 2 years, at +2.6% Year-on-year, the surprise came from the steadiness, and even, the decline, in interest rates. It may be that the communication of Central Banks has been effective: by opening the discussion on the future exit strategies, major monetary authorities may have convinced that their support will not be reversed in the shorter-term. At the same time, excellent quarterly results from US banks, especially the most exposed to market activity, provided comfort that the current sky-high equity multiples will be compressed by a sharp rise in the denominator
Corporate results will be the focus of the week ahead, and assuming that interest rates remain quiet, we may enjoy a constructive trend, before the question of central banks starting to reduce their asset purchases takes centre stage in the summer. We haven’t changed our positioning in April. Stay safe.
Some complacency seems to be setting in in the Treasury market in relation to long-dated Treasury yields topping out. If on the one hand the high-volatility phase of their rise should be over and leave room to less market-rattling swings, on the other it does not square up that amidst the Mother of All Public Interventions in the United States the US yield curve badly lags market-implied inflation. After all, both indicators currently express a market angle on the strength of the business cycle in America and they should move somewhat more in tandem.
The so-called breakeven inflation, the difference between the yield on the 10-year Treasury note and the one on Treasury-Inflation-Protected Securities for the same tenor, has been rising steadily since its March-2020 pandemic low to reach its current 2.37%, almost the top-end of the historical range. Investors have been discounting a constructive, post-recession unfolding of the business cycle aided by the strong support of both the Fed and Congress. The signal is that future inflation must normalize, especially as the Fed has embraced a new regime called Average Inflation Targeting, whereby Fed officials want to materially see inflation rise above target before tightening policy. The yield curve, measured for instance as the difference between the yield on the 10-year and the 3-year note, has been steepening steadily as well, anticipating strong improvements in the economy. But given the extraordinary nature of the public interventions and strong real growth into year-end forecast at levels not seen since the ‘80s, one would expect the yield curve to steepen further to be more aligned with macro projections and what indicated by breakeven inflation. Otherwise, markets should record a huge failure in the possibility of persistently raising price pressures by pushing back down break-even inflation. Under this scenario macro projections would also be likely to somewhat disappoint.
It seems more plausible to us that markets are just taking a breather, with long-dated yields range-bound since March, ready to reassess as fresh inflation and growth forecasts are released. Also, Fed officials mentioned that towards summertime it would be appropriate to initiate talk about when to start the winding down of the program of asset purchases, the Fed Treasury-buying program currently exerting downward pressure on market rates. If economic expansion rates remain sustained, as they should since the Fed is driving a high-pressure economy, and the discussion on QE tapering gains traction, as it should, with the major investment houses expecting tapering to be started early in 2022, then most ingredients would be there for yields to start rising again.
Under this scenario, duration risks would be re-emerging later this year, with renewed downward pressure on gold and one more bounce in the US dollar.
Fixed Income Update
Within days of our last weekly publication, where we outlined our firm belief that most of the yield uptick is behind us, the US Treasuries caught everyone by surprise. Analysts have been scampering to explain the massive rally in the long-end of the curve on Thursday when the 10-year yields came down by seven bps to trade at 1.58% despite positive surprises in a multitude of economic data. According to a Goldman Sachs analysis, these kinds of price actions are rare, and a decline of more than 20 bps in the month following positive data surprises has never happened
A possible explanation for the rally could be that there was a lot of short-covering as the JP Morgan Treasury Client Survey had surged to its shortest level since early February and is on the shorter end of the range we’ve seen over the past two years. Adding fuel to the fire was Chairman Powell’s reconfirmation that conditions are not yet ripe for a rate hike before the end of 2022. This has resulted in rate hike expectations being pushed back by a quarter to April 2023. So we think the rally last week was more technical than fundamental and could be intermittent during the consolidation phase than a signal that treasuries have topped out. We do not believe the upward pressure on the yield is over yet, and this is not the time to change our views.
The sub-asset classes turned green, driven by the surge in treasuries. Spreads of different sub-sectors traded sideways. In a reversal of fortunes, the worst-performing asset class Emerging Market Sovereigns topped the weekly chart with a +1.1% return last week. Other long-duration asset classes such as GCC Debt and Investment Grade Credit also were in the top half of the chart due to the same reasons. But we continue to ask the investors to exercise caution when going into the long-duration bonds as this pause may be short-lived.
The only negative spot was Asian High Yield that returned -0.2% due to the adverse reaction to the Huarong saga. The contagion effect has been lower than what headlines had screamed. In fact, Chinese authorities directed local banks to continue to support the distressed AMC, and the regulator insisted that the company’s operations are normal and the firm has ample liquidity. The bound complex of the firm rallied sharply on Friday, with 5-year CDS falling by a whooping 500 bps to 956 bps as of Friday. This gives hope that the Govt is working to contain the fallout from the event, and we maintain our positive stance on the Asian HY subsector
GCC Debt outperformed the broader Emerging Market debt driven by a solid performance from the long-end of the sovereign curves. DIB sold its long-awaited AT1 perpetual, which could be used to refinance the outstanding Noor AT1 Sukuk that has a call date in June 2021. The new issue was oversubscribed by 5x and is an official record as the lowest ever coupon for a subordinated GCC bank debt.
Equities continue to make new highs as better than expected Q1 earnings releases, indicate the economic and corporate recovery is well in place. This is acting as a tailwind for stocks and easing valuation pressure. Also, 2021 consensus earnings growth estimates have been moved up by 6% for the US, taking EPS growth to 27% and for Eurozone by 3% taking EPS growth to 38%. Earnings have a 6 to 7 X beta to economic growth and global real GDP is seen to be moving from -3.6% in 2020 to +6.5%, this year. The world has seen the sharpest economic "V" in history—a deep recession and rapid recovery within just five quarters. Longer-term bond yields rising have caused concerns but are reflective of the global economy’s faster-than-expected recovery from the COVID-19 crisis, though worries on inflation and their impact on input costs remain. However, recent stabilization of the 10-year US Treasury yield to 1.58% has led to a rebound in growth stocks, with technology the best performing sector in April so far. The equity rally is broad based in terms of geographies and sectors with both EM and DM stocks gaining c.1.5% last week. Optimism remains elevated— improving profit margins, the Vix at low levels, improving PMI’s and record inflows with $ 334 bn into equities in Q1.
Our overweight on US equities is supported with US GDP growth estimated at 6 to 8% this year—the fastest pace since 1983 and reflected in the almost 12% ytd S&P 500 gains with the Nasdaq close behind. Increased optimism, with a strong start to Q1 earnings season. The banking sector earnings surprised positively, though a large part of earnings beats was a release of loan loss reserves. Financials remain our top call in global sector positioning and we see more upside driven by the economic recovery. Market sentiment remains positive for continued US equity performance as better-than-expected housing construction activity added to other strong economic data, despite the April University of Michigan Consumer Sentiment Index below forecasts and with near-term inflation expectations rising. Favorable earnings from Daimler and LVMH indicate an auto and luxury demand rebound in Europe, which ended the week with widespread gains. We have a relative overweight call on the UK, as energy and commodity prices remain supportive.
Our region sees continues outperformance from the UAE, with Dubai real estate rallying last week. We are also seeing an upswing in the logistics sector with Air Arabia and Aramex recent share price rise, indicative of resuming economic activity with the robust vaccination rollout. The UAE is seeing continued end user house purchases and longer-term vacationing from Asian and European tourists, as the strong social distancing measures and COVID monitoring in place, give comfort.
Markets in Asia rose towards the end of the week, with China leading the way following a sharp acceleration in Q1 GDP. As the regulatory overhang is now dissipating to some extent, with the record fine on Alibaba providing a closure hopefully, we would add to Asia equities. Consensus expectations are for 38% EPS growth for EM in 2021, though upward revisions by 1.5%, have lagged the developed markets.
Written By:Maurice Gravier Chief Investment Officer, MauriceG@EmiratesNBD.com
Emirates NBD Bank PJSC (“Emirates NBD”) is licensed and regulated by the UAE Central Bank and this website aims at providing Internet users with information concerning Emirates NBD Private Banking, its products and activities. Persons having access to information made available by Emirates NBD on this website accept the following rules:
Emirates NBD uses reasonable efforts to obtain information from sources which it believes to be reliable, however Emirates NBD makes no representation that the information or opinions contained in publications on this website are accurate, reliable or complete. Published information may include data/information from stock exchanges and other sources from around the world and Emirates NBD does not guarantee the sequence, accuracy, completeness, or timeliness of information contained on this website provided thereto by unaffiliated third parties. Anyone proposing to rely on or use the information contained on this website should independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professionals or experts. Further, references to any financial instrument or investment product are not intended to imply that an actual trading market exists for such instrument or product. Emirates NBD is not acting in the capacity of a fiduciary or financial advisor. Any publications on this website are provided for informational purposes only and are not intended for trading purposes. Data/information provided herein is intended to serve for illustrative purposes and is not designed to initiate or conclude any transaction. The information available on this website is not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law or regulation. This website and anything contained herein, is provided "as is" and "as available," and that Emirates NBD makes no warranty of any kind, express or implied, as to this website, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.
The provision of certain data/information on this website is subject to the terms and conditions of other agreements to which Emirates NBD is a party. Emirates NBD reserves the right to make changes and additions to the information provided at any time without prior notice. The information may be modified or removed without prior notice. No buy or sell orders submitted via the internet or email will be accepted. In addition, the data/information contained on this website is prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors relevant to the determination of whether a particular investment activity is advisable.
Information contained on this website is believed by Emirates NBD to be accurate and true, in all material respects. Emirates NBD accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained on this website. Further Emirates NBD accepts no liability for the information and opinions published on the website and is under no obligation to remove outdated information from its website or to mark it clearly as such. The information given on this website may not be distributed or forwarded in whole or in part. Accordingly, anything to the contrary herein set forth notwithstanding, Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries shall not, directly or indirectly, be liable, in any way, to you or any other person for any: (a) inaccuracies or errors in or omissions from the information available on this website including, but not limited to, quotes and financial data; or (b) loss or damage arising from the use of this publication, including, but not limited to any investment decision occasioned thereby. or (c) under no circumstances, including but not limited to negligence, shall Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries be liable to you for direct, indirect, incidental, consequential, special, punitive, or exemplary damages even if Emirates NBD has been advised specifically of the possibility of such damages, arising from the use of the information on this website, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business. Emirates NBD expressly accepts no liability for losses or damages of any kind arising from using or accessing this website or links to third-party websites or from viewing information on any of its web pages. Furthermore, Emirates NBD accepts no liability for any unauthorized manipulation of users IT systems. Emirates NBD expressly draws user’s attention to the risk of viruses and the threat of hacker attacks
Third Party Website:
Users may be aware that Emirates NBD has no control whatsoever over third-party websites linked to or from this website and therefore accepts no liability for the content of such websites being correct, complete and legally valid for the products and services offered on such websites. Emirates NBD’s express written permission must always be sought before including a link to this website on a third-party website.
None of the information on this website in any way constitutes a solicitation, offer, opinion, or recommendation by Emirates NBD to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any security or investment.
The information contained on this website does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. Certain matters in this publication on the website are about the future performance of Emirates NBD or members of its group (the Group), including without limitation, future revenues, earnings, strategies, prospects and all other statements that are not purely historical, constitute “forward-looking statements”. Such forward-looking statements are based on current expectations or beliefs, as well as assumptions about future events, made from information currently available. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “seek”, “believe”, “will”, “may”, “should”, “would”, “could” or other words of similar meaning. Undue reliance should not be placed on any such statements in making an investment decision, as forward-looking statements, by their nature, are subject to known and unknown risks and uncertainties that could cause actual results, as well as the Group’s plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized.
Risk: In addition, before entering into any transaction, the risks should be fully understood and a determination made as to whether a transaction is appropriate given the person’s investment objectives, financial and operational resources, experiences and other relevant circumstances. The obligations relating to a particular transaction (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk should be known as well as any regulatory requirements and restrictions applicable thereto. Data included on this website may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, and credit risk. Emirates NBD may use different models, make valuation adjustments, or use different methodologies when determining prices at which Emirates NBD is willing to trade financial instruments and/or when valuing its own inventory positions for its books and records.
Investment in financial instruments involves risks and returns may vary. Before making such an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment.
The information on this website has been developed, compiled, prepared, revised, selected, and arranged by Emirates NBD and others (including certain other information sources) through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, and money and constitutes valuable intellectual property of Emirates NBD and all present and future rights in and to trade secrets, patents, copyrights, trademarks, service marks, know-how, and other proprietary rights of any type under the laws of any governmental authority, domestic or foreign, shall at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties and you acknowledge that you have no ownership rights in and to any of such items. Except as specifically permitted in writing, the information provided in this website shall not be copied or make any use of any information on this website or any portion of the intellectual property rights connected with this website, or the names of any individual participant in, or contributor to, the content of this website, or any variations or derivatives thereof, for any purpose. Further you shall not use any of the trademarks, trade names, service marks, copyrights, or logos of Emirates NBD or its subsidiaries in any manner which creates the impression that such items belong to or are associated with you or, except as otherwise provided with Emirates NBD’s prior written consent,
The information on this website solely for non-commercial use and benefit and the use of this information is not intended for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. Information contained in this website shall not be used, transferred, distributed, reproduced, published, displayed, modified, create derivative works from any data contained on this website or disposed of in any manner that could compete with the business interests of Emirates NBD. Any part of this website may not be offered for sale or distribute it over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet without the prior written consent of Emirates NBD. The information contained on this website may not be used to construct a database of any kind. The data on this website shall not be used in any way to improve the quality of any data sold or contributed by you to any third party.
In accessing this website, you acknowledge and agree that there are risks associated with investment activities. Moreover, you agree that your use of this publication is at your sole risk and acknowledge that the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described on this website and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with you.
Getting ready for a booming economy in Q2
How was your website experience today?
Subscribe and stay updated!
Get exclusive deals, latest promotions and important information
All this and more in the Emirates NBD newsletter
You are leaving the Emirates NBD Website
You will now be redirected to an external website to view this content. Emirates NBD or any of its subsidiaries does not bear liability/responsibility for any other information published by the website owner or publisher.
You will be redirected in 5 Seconds