Investment View Q3 2017
Our short term tactical indicators indicate a continuation of market corrections which started in June this year. Current markets are not supported by attractive valuations. Lack of liquidity and sudden panic can cause sentiment to change negatively further.
However, later in the year, we expect markets to calm down and our technical indicators predict a strong rebound of the main U.S. stock market (SPX rising to 2600).
Central bank tapering announced by the Fed for the end of the year going into 2018 will influence liquidity with consequences for asset prices in general. Investors may be too complacent at the moment underestimating the Fed’s aim to normalize interest rates.
It appears President Trump’s policy momentum has flagged. So far, no plans on fiscal measures or infrastructure projects have been announced, undermining U.S. growth expectations and the value of the U.S. Dollar. The very weak U.S. Dollar is perhaps the clearest reminder that a U.S. recession cannot be excluded in 2018 (we do not believe in this scenario).
A U.S. recession would undermine the announced plans of the Fed. A re-launch of QE accompanied by lower U.S. interest rates can be expected should a recession occur. This scenario is not widely expected.
The strong EUR/USD exchange rate is unexpected in the context of current Central bank policies (the Fed and the ECB). The strong rise of the EUR may be partly explained by the return of political stability and a healthier economic picture. The EUR was also under-owned. The very weak USD is welcome news for American exporters and helps U.S. inflation (imported inflation), but undercuts the policies of the ECB, potentially impacting potential growth of the euro area.
The huge buying program of the ECB did manage to stabilize the volatility of the euro area bond markets. However, this has also liberated enormous money flows passing from one region to the other, increasing foreign exchange volatility as a result.