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A steady increase since 2015: will it be enough to convince the FED to raise rates?

18 July 2016

Last week, markets were undecided : systemic risk on one side, great macroeconomic news on the other side. The bulls have won!

Last week, markets were undecided : systemic risk on one side, great macroeconomic news on the other side. The bulls have won!

Markets had indeed all good reasons to make that choice last week, as least on a short term basis:

  • Italian banks issues have been fading, especially regarding the Monte Dei Paschi case. The Atalante fund should be used in the coming days / weeks to buy non performing loans and it should remove some pressure from the banking sector. An “Atalante II” fund is also under discussion to keep on solving this problem on a broader basis. Well, “mutualizing the problem” might be more appropriate than “solving” as those NPL would be bought by other Italian Banks at a price that won’t allow them to hope for any return of investment before many years. But still, pressure should be lower in the coming days, and that’s enough for the time being.
  • Earnings season in the US has begun in a very classical way: 65% above consensus, 15% neutral and 20% below. If you aggregate the results, it is 0.17% above consensus. Most of the time, markets like earnings seasons and this quarter is no exception. 
  • Macro data continue to be good with retail sales above expectations in the US and Chinese data (new loans, industrial production, GDP..) is also above consensus.
  • Rumors of “Helicopter money” have been increasing in Japan after the bigger than expected victory of Shinzo Abe last week end, and after the visit from the American economist Ben Bernanke last week-end. He is not named “Helicopter ben” for nothing!
  • Inflation in Eurozone was in line with expectations but Inflation in the US was a bit higher than expected, putting a bit of pressure on US rates.

The result was of course pretty good for equity markets and pretty bad for core fixed income markets. Yen was an outlier, losing more than 5% vs USD after Japanese rumors.

We think that this “risk on” move can continue next week: we are still at the beginning of the earnings season in the US, the ECB in only at the end of next week and banking news could be good in the coming days. But that being said, being euphoric might be a bit risky right now as the situation of European banks won’t be solved easily.

La Française’s Essentiel Markets brings you an insightful analysis of the latest financial news by François Rimeu, Head of Total Return at La Française Asset Management.

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