ETF Securities Research Blog

Frexit less likely but domestic challenges

Market’s participants welcomed the lead of Macron in the first round of the French presidential elections. The euro jumped 1.3% and French equities are up 4% led by French banks. We believe the excessively high OAT-Bund yield spreads will continue to tighten gradually as we get closer to the second round of the presidential elections and the Parliamentary elections. Read more…

April 2017: Getting more constructive on US assets

For April, our equity model suggests to remain neutral on US equities for the first time since August 2016. Our bond model suggests increasing allocation to government bonds as well as US investment grade corporates, while remaining neutral on US high yield as CDS levels are rising. The commodity model is going underweight all commodity sectors with the exception of industrial metals and livestock (see table below). Read more…

Macron the centrist-populist

Macron’s centrist ideas are increasingly appealing to a French electorate that is used to frequent and sclerotic shifts in the government between the left and right. We believe the French OAT – German Bund 10-year spread is likely to tighten further as Macron rises in the polls. Read more…

Brexit blows the UK Budget

The UK Treasury is set to miss its budget target again in 2016/17 and has no intention to return the budget to balance during this parliament. Although fiscal deficit is expected to jump to £59bn (from £39bn in March) in 2017/18, it’s a good sign that the Government is trying to offset the negative impact of Brexit and not leave monetary policy to do all the heavy lifting. Chancellor Hammond will borrow around 2.5% of GDP more than was the objective in March over the next five years. Read more…

Fed on hold in September as US non-farm payrolls disappoint

The Fed has another excuse to hold off on a September rate hike. Although Chair Yellen said that the case for a rate hike has strengthened in recent months at the Jackson Hole Symposium, she indicated that the decision will be heavily data dependent. A string of worse-than-expected data since that announcement – ISM manufacturing, non-farm payrolls and auto-sales – gives the Fed reason to maintain their dovish stance for now. Read more…

Post Brexit “Continental Partnership”: to remedy or exacerbate market volatility?

The “Continental Partnership” (CP) – an independent framework proposal for the UK-EU post-Brexit negotiations – would avoid the UK and the EU “being dragged into unprincipled bargaining” but would also consist of a jurisprudence for all EU members. Although the proposal could reduce some long-term concerns about the economic consequences of the Brexit, the creation of an alternative to the “one-size-fits-all EU” could lead to more members deflecting. Such an outcome could lead to further market volatility and raise the demand for defensive assets.

Read more…