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Increase in the ISM non-manufacturing index at 57.4 in United States last month

11 July 2017

The move higher in bond yields has continued last week with German yields 10bps higher, reaching their YTD high at 0.56%, we see the same movement in the United States, Canada, etc. However, no specific news this week but large positions from investors seem to be unwound, which explains current moves.

ECB is trying to soothe tensions by saying accommodation withdrawal will be gradual, support is still justified, etc. For the moment, impact is close to nil.

Euro curve implies today a first hike in June 2018 and 25bps hikes in total in 2018. This would imply quite a brutal end to QE (from 60 billion Euros per month until December 17 to 0 in June), since Mister Draghi always said rate hikes will come after QE end. This scenario is not impossible, but looks quite an aggressive one. Given where inflation is, we do not think German front end will go much further from here. Regarding the long end, there is still some room left, real rates are still pretty low but here again, we are close to target and a short position does not look very asymmetric. On the other hand, we think there is still room to go on US short end.

Eurozone macro data stayed decent with strong German and French industrial production. In the United States, we observe a stunning 57.4 ISM figure coupled with good employment report, even though wage growth did not tick up, once again.

Equities are flat this week, and Eurostoxx is stuck to post election level 3440. We continue to keep the same view : macro is good, micro as well with EPS expected to grow 15% this year. Eurostoxx is up a mere 5% YTD and valuations are close to their historical average. In a world where excess liquidity will continue to flush and be invested, we think Euro equities remain attractive. We could however experience some volatility if fixed income market sell-off persists.

We made modifications this week, taking profits in Euro banks and Euro yields notably.

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