Monday, November 15, 2010

Financial views: Equities - Fixed Income - Credit - FX Outlook - Commodities


  • We are now more than halfway through the US reporting season with, so far, positive earnings surprises (especially for Financials). Despite this, we do not expect Q3 earnings to start a new wave of positive profit estimate revisions as seen in the aftermath of the Q1 and Q2 reporting seasons. Surprisingly, profit margins are still expanding in Q3, but with muted output prices and a slowdown in sales volumes, we think it is only a matter of months before profit estimates for 2011 will start to be revised lower. In the short term, we anticipate market headwinds to come from the current discussions between China, the US and Germany that were not resolved at the G20 meeting as well as from stronger EUR vs USD. In addition, soft job and housing markets, weak small business and consumer confidence, and industrial slowdown continue to be headwinds for the stock market. We reiterate our recommendation to overweight financials and maintain our defensive stance on cyclicals. Furthermore, we expect a soft stock market in the near term which could bring down global stocks. 

Fixed income

  • The jitters in the PIIGS debt market are increasing the risk of lower bond yields in Germany in the short term. Fundamentally, long bond yields are now forming a trough, although there could be some modest downside to long bond yields for the remainder of this year. We expect a trough in bond yields early next year and forecast rising yields throughout 2011 as economic growth reaccelerates. We expect German bond markets to outperform the US.
  • Intra-Euroland and Scandi: We are long Germany and Italy versus Spain and France. We also recommend buying T-bills issued from Italy, Ireland, Greece, Portugal and Spain. We are overweight Scandinavia versus Euroland.


  • We remain positive on credit for the moment, but it is becoming mainly a carry play as the spread tightening we have seen reduces the upside. Companies are still acting conservatively although we believe that event risk is on the rise as companies embark on more shareholder-friendly actions. Furthermore, renewed tension due to the debt crisis is weighing on banks.
  • Primary market activity is levelling off but we still expect activity in the coming weeks before we close off for the year in December.

FX outlook

  • We believe the Fed’s QE2 and the ECB’s exit strategy combined will eventually push EUR/USD higher once again. However, in the very short term, it seems that the European debt situation is dominating EUR/USD. Low rates for longer fuel demand for riskier currencies and AUD and NZD could continue to outperform while CHF might edge lower. USD/JPY is, in our view, heading for a new all-time low, below 80, but it is currently getting some support from higher US yields. Sterling is currently getting support from lower EUR/USD and a less hawkish BoE, but we believe gains will not be sustained – the UK economy is too weak and the BoE will eventually opt for QE.
  • We are positive on both SEK and NOK going forward. But relative rates are currently working against lower EUR/NOK and EUR/SEK, and ahead of year-end caution is warranted due to heavy positioning that can be scaled down.


  • The past week has seen commodities trading significantly higher on strong Chinese numbers despite the stronger dollar. The fundamental picture is improving, but the move in prices might be slightly exaggerated.
Full report: Financial views: Equities - Fixed Income - Credit - FX Outlook - Commodities

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