Global Weekly: Not too worried

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Stock markets had a good week. European stocks outperformed the US, and rose some 2%. Investors do not seem to be too worried about the potential tariff plans of the US government and the risk of a trade war with China or Europe.

There were no major differences in sector performances this week, although IT stocks continued to lead the pack with particular strength in semiconductors. IT and consumer discretionary are the only sectors that are really outperforming year-to-date, while utilities and real estate clearly lag. Consumer discretionary stocks benefit from the continuing good economic prospects, while IT is regarded as a secular growth sector by investors. On the other hand, utilities and real estate suffer from the increases in long-term interest rates in both the US and Europe. 

Company news flow was limited as the earnings season is largely over now. There were, however, some notable stock movers. First of all, the US insurer XL Group was the best performer within the S&P 500 as the French financial Axa launched a USD 15 billion takeover offer for the company. Axa shares lost 10% as investors believe the price paid is high and question the strategic rationale. Shares of Rolls Royce rose around 15% after reporting solid numbers. Also, the Austrian semiconductor and sensor company AMS had a great week and the share rose some 15%. Over the last year, AMS has been one of the best performing stocks in Europe, as investors are positive about the potential of the application of its sensors in automotive and facial recognition, for example in Apple’s iPhone X.

Still too foggy

Inflation has been a key market driver this year. The balance of risks to the general inflation forecast is tilted to the upside, given the US fiscal stimulus and the closing output gaps worldwide. In the US, the most important release is the jobs report for February, with mostly focus on average hourly earnings. Another strong monthly print would likely add to the inflation story. In that regard, US Treasury yields which traded on average around 2.87% for the last couple of weeks, could test the psychological level of 3% in the near term. This would implicitly indicate a period of an overheating economy. Given the strong statements by Fed Chair Jerome Powell concerning the outlook for the US economy, it cannot be ruled out that the Fed will be raising its 'dots' projections to three hikes for 2019 at its next meeting on 21 March. This year, we expect three Fed rate hikes.

With Italian elections behind us and an expected outcome of a likely hung parliament, we expect German 10 year Bund yields to remain within a tight range of 0.60% and 0.70% and Italian 10 year government bond yields at around 2%, as investors keep holding an observant stance. The same should also be valid for both rating agencies (Fitch and Moody’s), that will review Italy’s country rating on 16 March. Any surprising actions could lift the yield spread compared with German Bunds with roughly 20 basis points to around 160 basis points, but this is not our base case. The wait-and-see approach to political uncertainty remains intact.