Weekly Market View
Ukraine peace plan lifts Europe, dollar breaks lower
US President Trump’s forceful intervention in seeking to end the Ukraine-Russia conflict has boosted European equities and the EUR. Germany’s plan to boost infrastructure and defence spending as a fallout of a ceasefire in Ukraine is likely to fuel European assets further, benefitting diversified portfolios. Three of our four overweight equity sectors in Europe (finance, communication services and healthcare) are among the top performing sectors this year. We continue to prefer these sectors. Our exposure to Europe via a diversified portfolio means our global balanced allocation is up 1.7% YTD, despite US equities falling. Even after the rally, European stocks remain inexpensive vs. US, while European earnings estimates have been upgraded. Meanwhile, the USD’s break lower is positive for risk assets as USD weakness eases global financial conditions. This is another reason to stay invested and diversified. We would sell the USD on rallies via a bearish USD/JPY idea.
Key client questions
Equities: How do we square the circle between falling Q1 earnings and the equity market rally?
Equities: Is the Euro area equity rally worth chasing?
In our Global Market Outlook, we highlighted two conditions that were needed for Euro area equities to sustain outperformance: a firm easing of Europe's debt limits, and a turn lower in the US dollar. This week, Germany's incoming coalition partners agreed on plans to boost infrastructure spending and ease Germany's debt limits. The US dollar also fell sharply, easing global financial conditions. While we remain underweight on Europe in a globally diversified allocation, we favour Europe's financial and technology sectors, balanced by defensive exposure to communication and healthcare sectors.
Bonds: What is the impact of the Fed's bond buying plan on the High Yield bond market?
Equities: Is it attractive to buy US equities after the recent dip?
We remain positive US equities on a 6-12-month horizon as we believe the Trump administration will step back from extreme policy measures that damage the growth outlook. We also expect Fed rate cuts to extend the growth cycle, benefitting US equities. We see opportunities to add exposure to US equities as the SP500 index approaches key technical support level around the 200-day moving average of 5,731, followed by support around 5,600.
FX: Is it time to buy Emerging Market currencies?
Equities/ FX: What is the outlook for China’s equities and CNH after the National People’s Congress?
China unveiled 5% growth target and a fiscal stimulus (impulse) equal to just over 1% of GDP at the National People's Congress. That said, we expect achievement of the growth target will likely require more stimulus as policymakers contend with domestic challenges. We see USD/CNH to trade sideways, with a bullish bias towards 7.35 in three months. We also remain Neutral on China equities, with a barbell approach through our opportunistic ideas:
1) Hang Seng Technology Index, offering growth opportunities, and
2) China non-financial high dividend state-owned enterprises (SOEs), offering stability.
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