Divergent forces: Balance risks
Ongoing dovishness from Central Banks and higher geopolitical risks are the divergent forces driving financial markets at this point. Investors should continue to exploit market opportunities where there is still value (being selective on equity and credit and with an increasing focus on quality), but at the same time, constantly reassess the risk factors in their portfolios considering different dimensions (credit, liquidity, market risk).
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FED unwinds its balance sheet
Even if it was broadly expected, the decision to start the reduction of the balance sheet is historical. The FOMC projections reduced their estimate of the terminal rate to 2.75%. The lower terminal Fed Funds rate means that the Fed is modestly closer to the end of its tightening cycle. We continue to favor credit sectors based on solid fundamentals, and we are very cautious on the most rate-sensitive sector of government securities.
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ECB on hold, but more details on what’s next
We expect the ECB to announce a reduction of its asset purchases for 2018 in October. By postponing decisions regarding QE, the ECB opens the door to more of the same for the fixed income markets. This said, the perspective of a turnaround in monetary policy is not going to vanish, and the tapering topic will be back probably sooner than later.
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Amundi Global Investment Views Sept. 2017
Despite a very strong Q2 earnings season, equity markets halted their march higher in August, amid renewed geopolitical tensions. Meanwhile, the economic cycle is sound and synchronized at a global level. In this scenario, we believe investors should continue to maintain a moderate risk-on stance, with an increasingly selective approach as valuations become tight in some areas of the market.
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FED prepares for balance-sheet normalisation
We believe that the Federal Reserve will continue to gradually increase rates, not merely in light of their dual mandate for full employment and price stability, but also to foster financial stability. Balance sheet normalization may have a limited overall impact on Treasury yields in the intermediate term. The initiation of the program may result in a short-term selloff across fixed income markets, however the tapering initiative should be priced in.
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Amundi Global Investment Views July 2017
The global economy continues to improve, especially in the Eurozone, amid fewer political risks, leaving room for Central Banks to plan their exit moves. In our view, this environment supports global equities, but given the increased complacency, investors should also focus on hedging multiple tail risks. We maintain a positive view on global equities, especially in Europe, while in fixed income we favour low/short duration and carry opportunities in a bid to protect investor portfolios and deliver income.
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The Income Dilemma: seeking sustainable income in an era of paradigm shift
Income shortage is set to be one of the biggest challenges for investors in the future and it comes at a time when we are approaching a major paradigm shift from monetary to fiscal policy. We analyze how investors should consider exploring opportunities across a broader range of asset classes in an effort to avoid the low yield trap, while keeping a strong focus on downside risk mitigation.
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The Fed: Making Good on its Goal of Normalizing Rates
For the second time this year, the Fed has announced a 0.25% rate increase. FOMC members held firm to their projections for one additional rate increase in 2017, and three hikes in 2018. We believe the Fed is making good on its goal to normalize rates and reduce potential for asset bubbles, as well as its mandates to foster full employment and maintain price stability.
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UK Election Results: The Unexpected is Back
The unexpected has again been the outcome of the UK election: the Tories have lost their Parliamentary majority, while the Labour Party has substantially increased its position. This result triggers a new period of political instability, with PM May’s position being substantially weakened and increased uncertainty likely to have an impact on Brexit negotiations.
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Political Crisis in Brazil: Contagion Risk Limited
President Temer took office less than one year ago after the impeachment of Dilma Rousseff; his popularity rating is very low, as he has been trying to push through some unpopular reforms in order to rein in the nation’s depleted public finances that have been badly damaged by two years of recession. The current political turmoil could shift the focus from pension reforms to elections, with an outcome of no pension reform being implemented. We have taken a more cautious stance towards Brazilian debt on the back of recent events, but expect the crisis to be contained domestically.
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