Global Weekly: Oil on the rise and Google going into gaming

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The last days were very equity friendly. The Federal Reserve’s mood is getting more and more accommodative, making it very unlikely that we would see multiple rate hikes like last year. The energy sector performed well during the week.

The rally was driven by a rise of the WTI oil price above USD 60, as news of a bigger-than-expected withdrawal of crude oil in US storage hit the tape. US crude exports were above expectations and domestic inventories of gasoline and diesel were shrinking. This resulted in a 9.6 million barrel decline in inventories which in turn pushed energy stocks higher. Especially, US exploration companies such as Pioneer Natural Resources were among the winners.

This week, Google hosted its gaming event and announced plans to launch a new video game streaming platform, called Stadia. The platform will enable developers to build new games on the platform and enable consumers to stream games to different devices rather than relying on consoles. With this news, the focus shifted towards semiconductor and gaming companies, as they are potential beneficiaries. On the other hand, Electronic Arts that is already owning a gaming platform, is confronted with a new competitor.

In terms of factor investing, it is interesting to note that quality and momentum driven stocks could outperform again, indicating that equity markets are looking beyond the latest weak economic data and that we can expect earnings to recover in the second half of the year.

Bond Markets: New lows ahead

Bond yields have successfully challenged their recent lows. The final chapter of the Brexit negotiations keeps uncertainty high, but especially central banks’ actions were again keeping yields down.

At its recent meeting, the policy committee of the Federal Reserve (Fed) announced a clear end to its current balance sheet reduction. Additionally, the Fed’s expectations of the future interest rate path (‘the dot plot’), have been lowered in direction of the current market expectations and, as such, do not signal an interest hike in 2019 anymore. This was supportive for high-grade government bonds. German Bund yields dropped to new lows under 5 basis points and US Treasury yields fell to levels below 2.55%.

Low yields combined with low volatility usually is a supportive environment for spread tightening. Although primary markets are bringing quite actively new supply to the table, risk premia for corporate bonds (investment-grade as well as high-yield) decreased further, following a robust trend that is in place since the start of the year. We believe that this movement is now behind us for the most part. Investors searching for sufficient yield levels can, however, still lead to flow-driven performance and generate a basis for some further tightening.

The announcement of a new TLTRO, a favourable loan programme for European banks, might keep the supply volume from certain eurozone banks low. This should support covered bond spreads in general. Market technicalities are supportive for government-related bonds, as weak economic data is likely to pin core sovereign yields at low absolute levels. Inflation expectations in Europe have not further dropped after the significant declines in February. There are no signs of urgent upside pressure, however, as long as the Fed and the ECB are changing their policy towards a more accommodative direction and as long as global economic data continue to look blurry.