What is in store for investors after the German government talks collapse?
The possibility of new elections cannot be ruled out as exploratory talks to form Germany’s next coalition government failed. However, we do not see the German political gridlock as a major risk to the economic outlook and we still maintain a positive view on the Eurozone for 2018-2019.
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Venezuela on the edge of the cliff: let’s be cautious
President Nicolas Maduro recently announced the Republic of Venezuela’s intention to restructure all foreign debt, thus recognising the country’s current debt load as unsustainable. A full Venezuelan sovereign default scenario would be one of the most complex events of its type and would require a large-scale restructuring. Overall, we remain very cautious on Venezuela and do not see any rapid solution to the restructuring process. We continue to look for tactical opportunities as they emerge with risk control as a priority for our investors.
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China: 19th party congress and beyond
Overall, the results of 19th Party Congress were better than our expectations. China’s economy appears to be more resilient than it was and the coming slowdown looks likely to be moderate. The SOE reform has important implication for equity markets in sectors like telecoms, steel and energy. From a multi-asset perspective, we consider the Chinese medium-term structural story attractive.
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The bank of England raises rates: bearish for the pound
The reaction of the pound to the MPC (Monetary Policy Committee) has been very negative. The latest data indicates that the market is only slightly short GBP and we think that this view is too optimistic. At this stage, we believe investors should keep a cautious view on UK assets.
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New Fed chair: continuity but looser regulation
Jerome Powell will succeed Janet Yellen in February 2018. The appointment of a moderate republican, like Powell, appears as a pledge given by Trump to the moderates of his camp that he needs to pass tax cuts. With Powell’s appointment, we believe that the market continues to be “behind the curve” with respect to interest rates.
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A dovish ECB supports the credit market
The ECB statement reinforces our positive stance towards risky assets: high yield, credit and, especially, subordinated debt. Longer term, the very low level of interest rate is not in favour of long duration view, also taking into account the risk associated to the US market. a multi-asset perspective, the decision of the ECB to recalibrate the QE program over a longer time span is consistent with our constructive view for risk assets.
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Abe wins: a boost for Japan
The positive outcome of the election gives Mr Abe a stronger mandate to pursue his agenda. In our view, the stock market will continue to price in a global cyclical recovery, after the snap election result reduced the political tail risk.
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Preparing for transition
The benign growth scenario and the positive momentum for corporate earnings should continue to be supportive for equity markets, though we acknowledge that we are moving towards a more mature phase of the cycle. The expected transition will require, in our view, a risk rotation in 2018, with a cautious approach on the most complacent areas of the market
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Catalonia crisis: limited impact
The Catalan situation is not a direct threat to Eurozone institutions, and economic consequences are not expected to be massive, due to the small size of this region and the still vigorous recovery in Spain. On the government bond side, we expect the volatility generated by the Catalonia crisis to be short lived. On equity side, our constructive view on the market has not changed due to the recent events. Overall, we believe investors should focus more on a bottom-up stock selection approach that could also help to be less exposed to specific macro events.
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Japan’s Prime Minister Abe call for snap elections
Abe’s call for snap elections for the Lower House aims to secure an LDP majority longer than next year. At the moment the opposition is still in disarray and an LDP victory looks like a consensus call. The Japanese equity market looks attractive when compared with other DM markets, while fixed-income is expected to remain “quiet”.
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