EuroStocks surge on EuroBank’s loose moneyBy Vincent-Frédéric Mivelaz
Later today the European Central Bank is expected to announce no change to the benchmark interest rate of -0.4%. We expect the ECB to remain dovish, to keep the rate unchanged for all of 2018 and to continue its asset purchasing program of EUR 30 billion. This will buoy European equities.
That’s exactly what is happening already. Germany’s DAX led the way, closing at 12’245 (+1.09%), supported by Real Estate (+2.79%), IT (2.21%), Health Care (+1.77%), Materials (+1.32%) and Financials (+1.14%). It seems nothing can stop German expansion now that the continued rule of Chancellor Angela Merkel was confirmed on Monday. The Euro Zone headed the same direction (Euro Stoxx 50 +0.58%).
Still, there are worries – first about a potential tariff war with the US. President Donald Trump’s economic adviser Gary Cohn confirmed his immediate resignation: this does not augur well for US–EU trade. Inflation in the EU remains sluggish (February’s annual consumer prices rose 1.2%) while the EUR is strengthening against major currencies. EUR/USD and GBP/EUR are valued at 1.24 and 0.89 (YTD: +3.31% and +0.47%). Also there is the Italian stalemate. Unconventional parties might come to power, which could introduce new political risks.
Trump-Tariffs sink emerging currenciesBy Arnaud Masset
Will he or won’t he? Emerging markets are caught in a cross-fire, since US President Donald Trump yesterday said Canada and Mexico would be excluded from his proposed customs duties, if they succeed in reaching a new North American Free Trade Area agreement. Other countries would still be hit by Trump-Tariffs.
This maintains pressure on other commodity exporters, and so casts a shadow on their growth outlook. Moreover, increasing US Treasury rates are squeezing higher-yielding currencies by cutting return of carry trades. For example, the 2-year interest rate differential of the USA and Brazil stands at around 6%, down from 16+% in September 2015. This can only reduce the attractiveness of Brazil’s real. Yesterday, the BRL fell 1% to 3.2433 per USD, the Chilean peso was off 0.43% at 602.69 and this morning the South African rand fell 0.25% as USD/ZAR climbed to 11.8651.
Given the uncertainty, we think that investors should cherry pick emerging investments and stick to currencies least impacted by the new US tariffs, i.e. countries doing the least business with the US. Those with which the US has a trade deficit should be nervous: what guarantee do they have that President Trump will not use the same trick to target them?