September and Eastern promises

Authors
Research & Investment Strategy
Insight
PDF 341KB
03 August 2016

Key points

  • An unexpected equity rally in July seems to have been driven by upside surprises in US economic data and investors re-risking post Brexit.

  • Meanwhile, central banks have mostly disappointed markets but are keeping expectations high. In particular, confusion about BoJ policy has led to a strong selloff in JGBs.

  • We expect the Fed to hike in December, the BoE to follow a gradual easing path until year-end and the BoJ to underwhelm again after the comprehensive assessment in September. The ECB should deliver its asset purchase extension next month.

  • In this context, we remain underweight in equities and neutral in rates. We still prefer credit, supported by a global search for yield and strong technicals in Europe.

While the dust starts settling in the immediate aftermath of the UK referendum vote, the US outlook is naturally moving back to focus on investors’ minds. The recent dataflow has been relatively solid, with the exception of a disappointing Q2 GDP report. The June payroll report in particular gave reassurance that the labour market could continue to support the consumer sector in coming months. We expect growth to quicken in the second half of the year, especially after what appears to be strong destocking from US companies in Q2. We continue to see 2017 growth at a moderate 2.1%, a view that consensus is gradually converging to (2.2% at the time of writing)...