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Weekly – Investment Adviser – 2 May 2019


Equities Bonds
MSCI World +15.2% CHF Corp +1.6%
S&P 500 +16.6% US Govt +1.8%
Stoxx 600 +15.3% US Corp +5.7%
Nikkeï +11.2% US HY +8.8%
SPI +19.3% EUR Gvt +3.2%
China +30.0% EUR Corp +4.8%
Emerging +11.9% EUR High yield +6.1%
Currencies Commodities
USD index +1.5% Gold -1.0%
EURUSD -2.3% Silver -5.4%
EURCHF +1.3% Brent +32.4%
USDCHF +3.8% CRB index +7.6%
USDJPY +1.7%
EM FX +0.0%

In the eye of the storm

The USD remains expensive

The USD rally in 2018 and its resilience in 2019 are due to 3 factors: interest rates, growth and risk. In absolute terms, these factors continue to offer some support, but the USD is trading on the expensive side. Its rebound since Q2 2018 has been driven by the combination of high absolute interest rates and low FX volatility. This couple has allowed investors to buy the USD to take advantage of its higher yield with a relatively low currency risk. Even if the Fed has adopted a more dovish stance – the market is no longer expecting further rate hikes neither cuts – this change has not had the expected negative effect on the USD.

Last week, the trade-weighted USD (DXY) has rallied to reach a new fresh high, raising the concern about further risks. This has less to do with US growth news than with more sluggish activity (Europe and Germany) and softer monetary policy prospects (like the Bank of Canada, the Swedish Riksbank and, surprisingly, the Central Bank of Turkey and Russia) outside the US. More and more comments are emerging that the world economy is entering in a low growth / low inflation period. Despite prospects of some near-term better US data, the bond market has struggled to shrug off fears of a slowdown. And while it is still out on whether a flat or inverted yield curve foreshadows the next recession, the USD has completely disconnected.

US Yield curve and USD trade weighted

In fact, the dollar index (DXY), i.e. the one vs. the main developed currencies, has just reached a new yearly high and already erased 75% of its decline since the Trump election. We do not have the same picture when we take a more broad-based analysis, i.e. the one including EM currencies. The broad-based dollar already reached a top in Q4 2018, and since then has slightly decreased before stabilizing.

US Trade weighted (developed and broad-based)

Amongst the drivers, the most obvious is the Yuan. Since last October top, and prior to the US-China trade deal talks, the CNY has strengthened by 3.5%. President Xi just pledged against a Yuan depreciation as it harms other countries. Xi predicts that the CNY will go to 6.68 within 1 or 2 months as it will be supported by the PBOC shifting away from loose monetary policy, signs of recovery and upcoming trade talks with the US. So, the recent USD spike is more related to an EUR weakness than a USD strengthening.

  • The DXY breakout is not as significant as it may look

USD trade weighted and volatility

Carry trades, i.e. the desperate search for yield, has resumed. Investors have pulled sizable amount of money in USD-denominated assets, that have been funded with the sale of low yielding and liquid currencies like the EUR and the JPY. This has pushed more down the volatility. Actually, given the recent low level of volatility on the currency market, the USD should trade lower. The USD index is too high given both yield spreads and FX volatility. Traditionally, there has been a positive correlation between the USD and the volatility. A low volatility environment implies less demand for the USD as a safe-haven asset. The second factor pulling the USD up is the US economic outperformance. Given recent downward revisions to the Eurozone GDP outlook, this factor should remain a USD support.

speculative positioning

Finally, despite concerns about global growth, risk appetite indicators suggest that the USD is too strong given the low FX volatility, higher risky assets and oil prices which traditionally imply a softer USD.

The US-China trade talks, a major cause of growth concerns, may ease if the two countries can reach an agreement soon. Further, we think that the market should pay more attention to the fact that a protectionist US administration will not want a strong currency. At the start of March, Trump warned that the strong dollar hurts US competitiveness.

  • Paradoxically, markets’ volatility may resurface following a trade deal (profit taking mode)


Equities. “You can do it”

It did it. The S&P 500 broke out its resistance and is entering into new territory; the S&P 500 has closed at 2939.88 last Friday, higher than the previous record at 2936.7 on September 21st, 2018. We will have to confirm this break out in the coming days. The rise in stock markets was without euphoria, and investors rather in risk-off mode. A rather unusual situation.

S&P 500's breakout

Fears of a recession in 2019 are fading away :

  • US GDP growth in 1Q19 was stronger than expected.
  • The Chinese economy has stabilized thanks to fiscal and monetary stimulus.
  • The decline in the United State profits will be less marked than estimated in 1Q19. A month ago, Factset anticipated a 4.5% drop in profits, than – 3.9% last week and -2.3% today. Revenues are expected to grow by 5.1%. Refinitiv is only waiting for a slight 0.3% decline in profits in 1Q19.


In 2019, the cyclical / value sectors and technology outperformed the defensive sectors.

Sectorial performances in 2019

A trade agreement between the United States and China is approaching, it might precede one with Japan and Europe; this could boost business.

The impact of China’s mega-project Silk Road (One Belt, One Road) should not be underestimated.

After clashes with its Asian partners, China had traveled through Europe last month for a seduction operation, to encourage European states to participate economically and financially in this project. We are talking about a $ 1,000 billion.

Silk Road. Land routes in red and yellow, sea route in blue

The reading of the financial markets is complicated with the conflicting messages of risky assets, signaling reflation, and interest rates, implying an economic slowdown. Not to mention the ambiguous intervention of central banks. A trade agreement between the United States and China, as well as the technical breakout of the S&P 500 on the rise, are positive factors.

Equities. Sector rotation from Semiconductor to Health Care ?

Since the beginning of the year, the Philadelphia Semiconductor (SOX) index has risen 42% (+50% high a week ago), while the MSCI World Health Care sector only performed by 3.3%. The MSCI World has increased by 15%.

Philadelphia Semiconductor Index

However, the semiconductor companies have announced for the last 6 month a slowdown in activity with a decline in both volumes and prices. On Friday, Intel’s stock plummeted 10 percent on a cautious management outlook, signaling that the semiconductor rebound will be tough in 2019.

The health sector, and in particular health insurers and hospitals, suffered in April from the announcement by some candidates of the US 2020 presidential election, the Democratic Left wing, a health-insurance plan for all Americans, Medicare for All. Medicare and reimbursement companies have decried the risks of such a very expensive model. The sharp drop of some stocks in the sector represents buying opportunities.

Unlimitedhealthcare Share price

  • We stay away from the semiconductor industry
  • US health insurers and drug reimbursements companies offer buying opportunities,


Oil. The sector is moving

Brent hit $75 a barrel, then returned to $72 after Donald Trump’s threats about OPEC price manipulation. The price of crude was around $50 at the beginning of the year.

The agreement on a production freeze within OPEC+ is working, even though the effort is almost exclusively coming from Saudi Arabia. Pricing is difficult, because it is political. However, it is estimated that a good price for both producer and consumer countries is between $70 and $80.

Oil prices are expected to decline as US production increases, with the United States becoming the world’s largest producer at 12 million barrels / day. But the US want to reduce Iranian oil exports to zero and have stopped all Venezuelan oil imports to bend Maduro, which are bullish factors for prices.

Chevron’s takeover bid for Anadarko was followed by a 20% bid increase from Occidental Petroleum; that demonstrates confidence in US shale gas and the maintenance of a sustainable high oil price. The Permian basin in the United States is the subject of all desires.

The main shale basins in the United States

Large integrated oil companies need to find growth drivers, and they will do so by buying niche companies in exploration and production of unconventional oil and/or in particular regions. This top-line revenue growth process can be compared with the large historical pharmaceutical companies that buy biotech niche companies. Expansion by acquisition is cheaper than organic growth.

ExxonMobil has expressed interest in the Permian Basin, located in Texas and New Mexico. According to the management, ExxonMobil would be ready to make a major acquisition. The Permian basin accounts for only 6% of its total production.

  • In particular Chevron and ExxonMobil



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