Despite recent market turbulence we reiterate our key themes, albeit with minor adjustments
Economic outlook:
We see solid economic momentum in both Europe and the United States, but few signs as yet of inflation sharply accelerating. For now, no significant impact on real economic activity from financial-market events.
Monetary policy:
We expect three rate hikes by the U.S. Federal Reserve by the end of 2018. Towards the end of the year, attention is likely to shift to the European Central Bank (ECB ) following the Fed's path towards normalization.
Currencies:
We believe that the recent dollar weakness has been overdone. Yield differentials, high net long euro positions and technical factors should leave some scope for a dollar rebound. For December 2018, we are sticking to our call of $1.15 per euro.
Fixed income:
-
We are raising our rates forecasts for U.S. Treasuries (2-, 10- and 30-year) and German Bunds (2- and 10-year).
-
For the Eurozone periphery , we expect a tightening of spreads (vs. Bunds) for Italy to 120 bps , and are reducing our spread forecast for Spain to 90 bps (roughly where markets are currently trading).
-
No changes to other spread targets.
Equities:
-
We are sticking to our view that there is significant upside from current levels.
-
All our year-end targets for developed markets remain intact. Within developed markets this suggests larger upside outside the United States.
-
Within emerging markets , we are actually raising our targets for Latin America.
Fixed income
|
|
|
|||
|---|---|---|---|---|
|
United States |
||||
|
U.S. Treasuries (10-year) |
2.85% |
|
3.00% |
|
|
U.S. municipal bonds |
86.1% |
|
85% |
|
|
U.S. investment-grade corporates |
88 bp |
|
80 bp |
|
|
U.S. high-yield corporates |
369 bp |
|
350 bp |
|
|
Securitized: mortgage-backed securities 1 |
72 bp |
|
100 bp |
|
|
Europe |
||||
|
German Bunds (10-year) |
0.75% |
|
1.00% |
|
|
UK Gilts (10-year) |
1.57% |
|
1.40% |
|
|
Euro investment-grade corporates2 |
84 bp |
|
75 bp |
|
|
Euro high-yield corporates2 |
291 bp |
|
260 bp |
|
|
Securitized: covered bonds |
36 bp |
|
65 bp |
|
|
Italy (10-year)2 |
130 bp |
|
120 bp |
|
|
Asia-Pacific |
|
|||
|
Japanese government bonds (10-year) |
0.07% |
|
0.1% |
|
|
Asia credit |
219 bp |
|
210 bp |
|
|
Global |
||||
|
Emerging-market sovereigns |
287 bp |
|
285 bp |
|
|
Emerging-market credit |
282 bp |
|
270 bp |
* Source: Bloomberg Finance L.P. as of 2/9/18
F refers to our forecasts as of 2/12/18
1 Current-coupon spread vs. 7-year U.S. Treasuries
2 Spread over German Bunds
bp = basis points
For sovereign bonds, denotes rising yields, unchanged yields and falling yields. For corporates, securitized/specialties and emerging-market bonds, the arrows depict the option-adjusted spread over U.S. Treasuries: depicts a rising spread, a sideways trend and a falling spread.
The arrows’ colors illustrate the return opportunities for long-only investors. Positive return potential for long-only investors. Limited return opportunity as well as downside risk. Negative return potential for long-only investors.
Currencies
|
Currencies |
Current* |
Dec 2018F |
||
|---|---|---|---|---|
|
1.23 |
|
1.15 |
||
|
USD vs. JPY |
109 |
|
115 |
|
|
EUR vs. GBP |
0.89 |
|
0.88 |
|
|
GBP vs. USD |
1.38 |
|
1.3 |
|
|
USD vs. CNY |
6.3 |
|
6.8 |
* Source: Bloomberg Finance L.P. as of 2/9/18
F refers to our forecasts as of 2/12/18
Equities
|
Equity markets (index value in points) |
Current* |
Dec 2018F |
||
|---|---|---|---|---|
|
United States (S&P 500 ) |
2,620 |
|
2,750 |
|
|
Europe (Stoxx Europe 600 ) |
369 |
|
405 |
|
|
Eurozone (Euro Stoxx 50 ) |
3,326 |
|
3,780 |
|
|
Germany (Dax )1 |
12,107 |
|
14,100 |
|
|
United Kingdom (FTSE 100 ) |
7,092 |
|
7,500 |
|
|
Switzerland (Swiss Market Index ) |
8,682 |
|
9,450 |
|
|
Japan (MSCI Japan Index ) |
1,030 |
|
1,120 |
|
|
1,143 |
|
1,210 |
||
|
697 |
|
760 |
||
|
2,952 |
|
3,150 |
* Sources: Bloomberg Finance L.P. as of 2/9/18
F refers to our forecasts as of 2/12/18
1 Total-return index (includes dividends)
For currencies and equities, the arrows signal whether we expect to see an upward trend , a sideways trend or a downward trend .
The arrows’ colors illustrate the return opportunities for long-only investors. Positive return potential for long-only investors. Limited return opportunity as well as downside risk. Negative return potential for long-only investors
