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This level of earnings above expectation has not been reached since 2009

02 May 2017

This week was very busy with obviously the first round result of the French presidential election, but not only.

Markets cheered results in line with polls that show little chance to see Marine Le Pen elected. Market reaction was quite dramatic at the open:

  • +4% Euro area equities
  • +7% Euro area banks
  • -20bps on OAT/Bund spread

Markets do not seem to price any risk of a Front National victory. 

Many economic data came out last week.

Eurozone inflation erased the seasonal effect coming from Easter with a 4 year high print on core inflation (1.2%) while headline reached 1.9%. This figure did offset the ECB speech on the day before which was rather dovish, with Mario Draghi insisting on inflation being low and taking a long time to reach a level “below, but close to 2%”.

US data publications were heavy with Q1 GDP report. The figure was expected on the low side, as usual for first quarters, which proved to be right with 0.7% (vs 1% expected). This figure is to be relativised due to the effect of inventories (-0.9%) and Employment cost index above expectations (+0.8%, highest since 2008). The Fed having said that one should look above transitory GDP factors, we think the combo GDP + Employment cost index is dollar and yield positive.

Last week we had as well the announcement of the tax reform from the Trump administration. If enforced as such, it would be the biggest ever and would cost 20% GDP over the next 10 years… which would of course balloon US debt. There is no chance the reform gets passed as such, which is why markets didn’t react after the announcement. After the healthcare bill debacle, markets will now wait to see bills actually voted, which could take some time.

In the meantime, earnings season continues and is robust in the Eurozone: 75% positive surprises on revenue, highest score over the last 10 years.

It is hard to put a lot of Eurozone risk back in portfolios after the elections, given markets moved dramatically in the open. The risk we added was more on the Japanese side, and especially Yen. The latter rose a lot versus USD this year, japanese equities are down YTD, and micro data is robust. In short, we think this area could outperform. We preferred to sell JPY rather than buying Nikkei, but it is actually very much the same trade.

We also sold a bit of US duration and bought some US breakevens. 

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