Global Weekly: Equities – A technical correction

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Heading towards the Olympic Winter Games, global equity markets entered a steep downhill trajectory, followed by a bumpy recovery. Last Friday, markets started to decline after employment data was released in the United States.

The unemployment rate remained at 4.1%, but a more-than-anticipated increase of labour costs scared the market, fearing that a structural increase of labour costs could negatively impact corporate earnings.

Although this is theoretically possible, we think the underlying economic fundamentals are still signaling towards economic growth. We view the current sell-off as a market correction after an extended period of rising equity prices. This view is supported by the fact that investors did not seek such safe havens as defensive stocks. Instead the sell-off was all over the board, suggesting that this was a ‘technical correction’.

Several corporations have announced their 2017 earnings this week. French oil major Total showed once again it is very comfortable with current oil prices. Management is confident in its future and announced a dividend increase of 10% between 2018-2020. Furthermore, the company initiated a stock buyback of EUR 5 billion.

US bank Wells Fargo was one of the largest decliners, after the US central bank, the Federal Reserve (Fed), banned the bank from growing. The Fed is not satisfied with Wells Fargo’s progress in improving its risk management and compliance policy. The company has 60 days to present a detailed plan.   
US semiconductor designer Broadcom raised its offer for industry partner Qualcomm to USD 82 from USD 70 per share, this week. In doing so, Broadcom is trying to gain market exposure to growth markets such as telecom chips, autonomous driving and chips that are designed for the connected-world trend.

Bonds – Short spillover effects

This week, bond markets have experienced the strongest dip in Bund yields since the start of the year, after several weeks of falling fixed income prices. It seems like turbulence on the equity markets has driven some investors to the less risky core government bond markets. Nevertheless, the timeframe for 10-year German Bunds trading under 70 basis points was short and yields quickly climbed back to the levels seen at the end of last week. 

In the US, the same picture applied to US Treasuries, where yields quickly returned to over 2.8%. On Wednesday, Republicans and Democrats in the US Senate agreed on a new government budget. It will probably decrease the likelihood of a shutdown, but will increase the US debt level in the longer run.
After significant spread-narrowing of investment-grade corporate credits in Europe, spreads tended to stabilize on low levels this week. Peripheral spreads, however, continued this year’s declining trend. This signals that investors are not too concerned about the elections in Italy next month or political risk in general. 

Still, all eyes are on central banks. In the US, strong fiscal incentives through the recent tax reform encounter a tighter central bank policy. Markets do currently not expect the new Fed Chair Jerome Powell to execute an aggressive interest rate raise, but see the potential for several smaller steps during the year.