Improving economic fundamentals, but unprecedented political risks.
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■ Macro: We forecast stronger global growth in 2017, mainly driven by emerging markets. Growth in the US will probably accelerate on fiscal stimulus, while the eurozone is likely to maintain decent cruising speed. The Fed may raise rates at least twice and the ECB may announce further withdrawal of stimulus. Trump is a bigger risk to the global outlook than elections in Europe.
■ FI: We expect 10Y USTs to end 2017 at around 3%, driven by a further increase in both the 10Y breakeven inflation and the real rate. In the euro area, we expect 10Y Bund yields to rise further, reflecting firming inflation, influence from the US and ongoing discussion of tapering. Yield repricing should mainly involve the long and extra-long end.
■ FX: The tug of war between fundamentals, momentum and markets’ interpretation of policies will keep visibility low: we see some slowdown in the USD’s momentum early in the year followed by modest weakening, but uncertainty is unusually high.
■ Equities: We expect eurozone equities to rise. Financials and Materials are likely to outperform while sectors seen as substitutes for bonds, such as Telecoms, Utilities and Food & Beverage, should remain less attractive.
■ Credit: Rising risk-free yields will put technical pressure on safe-haven names due to allocation shifts into risky assets. We like shorter durations and lower credit qualities (BBB, hybrids, high yields) and, in particular, bank AT1s.
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