First major Central bank after Fed to hike, despite low inflation.
18 July 2017
After a quiet start this week, Wednesday was an interesting day:
- Janet Yellen had a dovish speech, she stressed that economic projections are highly uncertain. In particular, she said “there is uncertainty about when - and how much - inflation will respond to tightening resource utilization”. This lack of confidence in inflation pushed US TNote 5 bps lower and propelled EM markets much higher
- Bank of Canada held its committee and hiked as expected. They prepared markets in the previous weeks, but tone was even more hawkish than expected and that pushed CAD and Canadian yields higher. We think the move is very strong, especially given that inflation remains weak in Canada. We have therefore opened a short CAD/NOK, given that NOK did not react to an elevated inflation point.
All in all, global bond yields were a touch lower after the move higher in previous weeks. This move was driven by real yields. Equity markets exhibit a nice performance (+1.7% for Eurostoxx, +3.9% for MSCI EM).
EM foreign exchange is strong (TRY +1.3%, BRL +2.3%, MXN +1.7%). We keep our holdings in these currencies that exhibit a high carry in a context of falling inflation in Emerging markets. We like the trade even more because of the cheap valuation in real effective exchange rate.
We keep as well our Euro equities exposure (15%). The earnings season is coming up and should be a positive catalyst for this theme. We expect a solid 11% EPS growth.
This week, the main move was the short CAD/NOK.