Cross-Asset Weekly - J. Safra Sarasin · 5/19/2017 · Cross-Asset Weekly 19 May 2017 4 |...

Cross-Asset Weekly 19 May 2017

1 | Cross-Asset Weekly

Risk off

The market traded this week with strong risk off tone after President Trump came under increasing pressure in the US, as the odds of a tax cut and less regulation are being reassessed. The political situation led to a strong rally of safe haven instruments and a substantial drop in equities. We highlight the status of the Trumpflation trades in our US Rates and FX section (“Trumpflation – quo vadis?”), as well as our inflation assessment in the US Macro section (“The case of weaker inflation”). In the Global Equity Strategy section we discuss how market nervousness and a lack of reform momentum is expected to trigger more short-term weakness in US equities. Another important election promise of President Trump was to bring jobs back to the US. In a similar way, a promise of the “Leave” campaigners during the Brexit campaign was to end free movement of workers. In our European Macro section, we discuss why we believe economic arguments won’t be enough to contain populism against freedom of movement. Meanwhile, Emerging Markets were rattled by allegations against the Brazilian president. The Brazilian equity market and the Real dropped substantially. But, while uncertainty increased in Brazil, it has fallen in Turkey. In our Emerging Markets section, we provide a Macro update for the CEEMA region. We are particularly positive on Russia while the outlook for South Africa is mixed. This week’s highlights

European Macro 2EU-scepticism will remain - Economic arguments for free movement of workers alone might not be enough

US Macro 4The case of weaker inflation

US Rates and FX 7Trumpflation – quo vadis?

Global Equity Strategy 10When the trumpet sounds, investors take cover

Emerging Markets 12CEEMEA Macro Update

Economic Calendar 13Week of 22/05 – 26/05/2017

Market Performance 14Global Markets in Local Currencies

Contacts Dr. Karsten Junius, CFA Chief Economist [email protected] +41 58 317 32 79 Adolfo Laurenti Global Economist [email protected] +41 58 317 30 86 Ursina Kubli Forex Strategist [email protected] +41 58 317 32 80 Cédric Spahr, CFA Equity Strategist [email protected] +41 58 317 31 28 Dr. Florian Weber, CFA Fixed Income Strategist [email protected] +41 58 317 31 14 Emiliano Surballe, CFA Emerging Market Credit Strategist [email protected] +41 58 317 35 64 Kunal Singh, CFA Emerging Market Credit Strategist [email protected] +41 58 317 31 21 Thilina Hewage, CFA Emerging Market Credit Strategist [email protected] +65 6230 66 61



European Macro

EU-scepticism will remain - Economic arguments for free movement of workers alone might not be enough

Populist and EU-critical parties may not have received majorities this year in the elections in Europe. However, this is only a matter of time if economists and poli-ticians are not able to better and more proactively convey the benefits of Europe-an integration. In particular, the free movement of workers seems to displease many citizens. Explanations that higher mobility leads to a higher gross domestic product are not sufficient.

It is a debacle for the economic guild. In study after study it is estimated and shown that the free movement of workers and free market have economic advantages and lead to higher GDP. Companies benefit from the greater number of potential employ-ees; a thriving economy generates higher tax revenues; immigrants benefit from better labour market opportunities, and the relatives back home from their remittances. This should be a "win-win" situation for emigration and immigration countries. But that a large parts of the populations do not feel that way. Many voters want to limit immigra-tion and have given populist candidates an enormous support this year as well. If they have not yet been able to win majorities in the last elections in France, Austria or the Netherlands, this is not due to their European or immigration critique. Rather, the somewhat bumpy start of the new US administration and the uncertainties of the Brexit process may have led many voters to trust more traditional politicians than those with the most innovative hairstyles. So far, at least. A basic problem is that the debate about the free of movement of workers is misguid-ed. Economists often treat it similar to free trade. For most people, however, it means more immigration. Too little it is realized that this benefits mainly the mobile, well-educated and younger part of the population. The economic standard response to this view is that the gains from globalization/trade/mobility need to be better redistributed. This argument clearly contradicts the common thesis that European social systems are overloaded and not sustainable. It also does not offer an answer to the increasing ine-quality of income and wealth. While the declining share of total GDP that is paid to la-bour (rather than capital) might have more to do with technological change and new global value chains (GVC), for some parts of the population the distinction between those forces and immigration might not be clear. (Is it an iphone-app or the new neigh-bour that led to job losses in the community?)

Dr. Karsten Junius, CFA Chief Economist [email protected] +41 58 317 32 79

Many voters dislike the free mobility of people even if it leads to higher GDP

Not everyone is benefitting financially from the free movement of workers

Exhibit 1: Declining labour share in GDP fuels globalisation critic Exhibit 2: Contributions to the declining labour share in total GDP

Source: IMF (WEO Spring 2017), J. Safra Sarasin, 16.05.2017 Source: IMF (WEO Spring 2017), J. Safra Sarasin, 16.05.2017

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Exhibit 3: The labour share in total GPD declined strongly in tradable sectors like manu-facturing, transportation or mining

Source: IMF (WEO Spring 2017), J. Safra Sarasin, 17.05.2017

It is also not realized that stronger redistribution can compensate only for the absolute loss of income from immigration or globalization. It does not help if someone’s relative position in society changes. But that is what often counts most. It is not by chance that most definitions of poverty or wealth compare income to the median level in a society. Politicians who have realized this call the free movement of worker a “concession”, which must be made in order to realize the gains from free trade of goods and services as well as capital mobility within the internal market of the EU. In fact, the free move-ment of workers simplifies the other three freedoms. It is also a necessary condition for a common monetary policy. If people could not move between regions in a currency union then economic shocks in one region would be much more durable and painful. However, if too large parts of the population in many EU countries regard the free movement of workers only as a necessary but unwanted“ concession” and not as an advantage, freedom, or value itself, economists should discuss whether it is actually needed in the whole EU. They should show which specific advantages of the internal market would cease to exist with a reduced mobility of people. Without this discussion, for some the free movement of workers will appear as a dogmatic idea of those who want to transform the national states into a European super-state. Many voters might not feel at home in such a state anymore. They will point out that unrestricted mobility overburdens the capacity for integration in societies. Therefore, we expect that EU-scepticism and populism is likely to stay beyond this year’s elections. The current eco-nomic expansion should therefore be used to improve the institutional stability and re-duce social tensions and concerns. Only if it can be made clear what practical advantages free movement of workers has in most people’s daily life, then voters will understand that they would have to give up ad-vantages that they by now might perceive as unrelated matter-of-course. Only then will unrestricted freedom to move survive within the EU. And only then it will not lead to fur-ther EU exits. This requires emotional and practical arguments and not just striving for maximum efficiency.

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Redistributive policies can help only to a certain degree

Is the freedom to move really just a “con-cession” and not an advantage?

Emotions vs. efficiency



US Macro

The case of weaker inflation

We believe that headline CPI inflation, after its February peak, will hover at more modest levels of around 1.8%-2% for the rest of the year. A mix of factors could contribute to a weaker price environment: the changing market structure in oil production, the comeback of homeownership at the expenses of renting, and the adjustments resulting from health care reform.

Inflation is offering signs of a slowdown, after peaking in February, when the headline CPI index rose to 2.8% yoy, the highest level in five years. Since then, CPI slipped back to 2.2% in just two months, while core inflation, which excludes volatile items such as food and energy, eased to 1.9%, the lowest reading since late 2015. We believe that we have yet to see the end of the inflation retrenchment. This is the result of some un-certainty around the economic outlook, as markets reprice Trumpflation (see “Trumpfla-tion – quo vadis?” in US Rates and FX at page 7.) But there are other reasons why we have become increasingly sceptical about the sustainability of the reflationary process. First, energy prices are likely to remain bounded in the near future. Second, a shift in the housing rental market should keep a lid on shelter prices. Third, the cost for medi-cal care is likely to moderate as the sector adapts to the new regulatory framework, and uncertainty over the new health care law under consideration lingers. Services inflation, and in particular housing and health care prices, have been the ma-jor sources of reflation in recent years, and helped to counter significant deflationary pressure in 2016 (see Exhibit 1). If these dynamics relent, and energy prices remain range-bound, it is unlikely we will experience any significant pick-up in inflation, barring a geo-political shock to the oil market of a sudden acceleration in wages and salaries, which thus far has proven elusive. Energy: gasoline reflation ran its course. Energy is a relatively small component of the overall CPI index (7% of the total), but it is a highly volatile item, which may cause large swings to inflation readings. The largest sub-component is retail gasoline prices, which move in lockstep with oil prices (see Ex-hibit 2.) Shifts in oil prices are then a good indicator of what to expect in retail energy prices.

Adolfo Laurenti Global Economist [email protected] +41 58 317 30 86

We have become more sceptical about Trumpflation and its impact on consumer prices

Inflation in the services sector is likely to relent, holding a lid on overall CPI

Retail gasoline prices move in lockstep with oil prices, which are likely to remain range-bound

Exhibit 1: Prices for services outstrip overall inflation Exhibit 2: Energy prices are likely to remain range-bound

Source: Datastream, J. Safra Sarasin, 19.05.2017 Source: Datastream, J. Safra Sarasin, 19.05.2017

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In recent years, the market for oil has been adjusting to the new reality of the US shale producers, which have become the marginal supplier. As a result, US shale is now the driving force in the determination of the overall market price. This is also a market where technological progress has been dramatic: industry estimates shows that the breakeven point for US shale has dropped dramatically in the last three years. Many analysts now believe that any price move above $50-$60 would trigger significant in-creases in US domestic supply, thus setting a price ceiling for the entire oil market. The consequence is that it is unlikely that oil prices will move much far away from the price “corridor” of previous 12 months, as shown in Exhibit 2. OPEC’s effort to stabilize the cartel production reinforces our conviction. If this will be the case, as we antici-pate, it is rather unlikely that we will experience large increase in the price of retail gasoline in the near future. As far as gasoline prices are concerned, the reflation in the sector is probably completed. Housing: the appetite for rental apartments is slowing In the aftermath of the housing bust, the homeownership rate dropped, and more and more people opted for renting rather than owing a home. This broad trend had im-portant implications for inflation too, as housing is treated as a “service” (shelter) in the calculation of CPI. In this regard, housing prices enter into the CPI calculation ei-ther directly, for the rent of primary residence, or indirectly, as the “owners’ equivalent rent” (OER) – that is, the price a homeowner would pay for renting a house with the same features and location as the one currently owned. (In this way, statisticians can focus on the price of shelter as a service, instead of the price of housing as an in-vestment, which is beyond the goal of an index of consumer prices.) As the rental market soared after 2009, rent and OER prices also rose steadily (Exhibit 1.) But now the market is shifting. Improvements in the labor market and saving rates, as well as the still contained mortgage rates, are revamping interest in home purchas-es. While still away from the peak of 2005, home sales have returned to the same, el-evated levels of the late 1990s. As the interest in renting wanes, rental prices ease – and completions in multi-family units, which are mostly intended as rental apartments, is also reflecting the new trend (see Exhibit 3.) The bottom line is: the housing market has entered a new phase after the long healing that followed the bust. The new market realities suggest that rents will be less buoyant than in recent years. As a result, shel-ter prices in the CPI are likely to show less resilience and less upward pressures than we experienced in recent years.

Structural changes in the oil market make less likely a price surge much beyond $60-$70 per barrel

Rising rent and owner’s equivalent rent added upward pressure to prices after the housing bust

As homeownership comes back and inter-est in rental units wane, shelter prices should moderate

Exhibit 3: Rent inflation is easing as the market slows down Exhibit 4: Higher health care costs are cooling demand


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Health care: tightening the belt For many years, the price for medical goods (i.e. drugs and devices) and medical services outstripped the overall rise in prices in the economy. In fact, one goal of the Affordable care Act of 2010 (ACA, also known as “Obamacare”) was to reduce the costs of healthcare, while expanding insurance coverage. The outcomes have been mixed: the rise in consumer prices in the sector has indeed declined, in part because of regulations, in part because the new rules increased co-payments and out-of-pocket payments. The combination of high-er prices and higher direct costs for consumers has resulted in a fairly sharp deceleration in health care-related sales in late 2016 (see Exhibit 4.) This is a trend which is likely to con-tinue because of the growing challenges that Obamacare is facing, as consumers are left bearing the greater costs of health care. After the hefty price increases in recent years, we expect declining consumption will somewhat hold back further escalation in prices. Fur-thermore, the reform under consideration in Congress is likely to exacerbate these effects further. As a result, it is hard to envision health price inflation at the sustained levels seen pre-ACA (+4% yoy in average between 2000 and 2009), nor spikes to 4%-5% yoy as in 2012 and early 2016. Conclusions: what might go wrong? A mix of factors is contributing to an environment that makes unlikely a reacceleration of consumer prices: the changing market structure in oil production, the comeback of homeownership at the expense of renting, and the painful adjustments and uncertainty stemming from the reform in the health care sector. Prices for energy, rents, and health care were the major driver of reflation in early 2017, but their surge is coming to an end. Where might we be wrong in this call? There are two possible scenarios which might revamp the reflation story. The first one would be a geo-strategic shock to the oil mar-ket, possibly generated by political and military tension in the Middle East or the Kore-an peninsula. The second one is a sudden acceleration in wages and salaries, resulting in an overheating of domestic demand. The former is, by its very nature, impossible to anticipate. The latter is a concern closely monitored by markets and the Fed. It is also a scenario that assumes the tightening of the labor marker beyond full employment, a view that we do not see as entirely persuasive yet, for reasons we explained one week ago (see “How much slack persists in the labor market?”, Cross Asset Weekly, 12 May 2017). On balance, we expect that past the peak of February 2017, more modest infla-tion in the 1.8%-2% range is a feature that will persist for the rest of the year.

Health care reform shifted the burden of high prices on consumers, setting in mo-tion a reduction in spending that limits any further price acceleration

Energy, shelter, and health care prices will contribute to a more muted inflation for the remainder of the year

Geo-strategic tension or a sudden surge in wages and salaries are the upside risk to our inflation view



US Rates and FX

Trumpflation – quo vadis?

The hope of a significant reflation of the US continued to decline. Looking at the US yield curve, US inflation expectation, the EURUSD exchange rate, and the number of Fed hikes being priced, it appears that the market is losing faith in the Trumpflation trade. We believe this has significant implications for the Fed and for bond yields globally.

The Trumpflation trades were boosted by the hope of financial markets for substantial tax cuts and deregulation in the US. This hope, however, was already shaken when Trump initially failed to push the Obamacare repeal-and-replace bill through the House of Representatives. The market expectation was further dented after the Trump admin-istration was facing critic for firing the FBI director and for the handling of intelligence data. In addition, the alleged interference into the FBI investigation of former National Security Advisor Flynn led to a substantial risk off move in the US. The risk off and the repricing of the Trumpflation trades led to a strong rally in US Treasuries. This drove the 2s10s US Treasury yield curve – the curve which measures the yield spread between 10-year and 2-year US Treasuries – to a flatter level than it was prior to the election of Donald Trump (see Exhibit 1). The 2s10s curve is often seen as predictor for future GDP growth, whereby a flatter curve suggests lower growth. The curve tends to invert, i.e. the yield of 10-year bonds is below the yield of 2-year bonds, if the market is pricing the risk of a recession. However, due to the money market mutual fund reform, which created additional de-mand for shorter US Treasuries during 2H 2016, just looking at the US Treasury curve might show a misleading picture. Therefore, we use the average of the 2s10s US Treasury and the 2s10s US swap curves as an additional measure to evaluate the stage of the Trumpflation trade. It is currently at approximately the same level as it was after President Trump was elected on 8 November (see Exhibit 2). This suggests the market has substantially reduced the expectation of higher growth and inflation.

Dr. Florian Weber, CFA Fixed Income Strategist [email protected] +41 58 317 31 14

Trumpflation trades went into reverse due to the political uncertainty

2s10s US Treasury curve flatter than it was prior to the election of Donald Trump as US president

Broader measure of the US 2s10s curve is on the cusp of falling below the 8 Novem-ber closing level

Exhibit 1: 2s10s US Treasury curve is flatter than it was prior tothe election of Donald Trump as US president

Exhibit 2: Broader measure of the US 2s10s curve is on the cuspof falling below the 8 November closing level

Source: Bloomberg, J. Safra Sarasin, 18.05.2017 Source: Bloomberg, J. Safra Sarasin, 18.05.2017

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The signal from the yield curve is also confirmed by medium-term inflation expecta-tions. The measure of financial markets for medium-term inflation expectation is the 5-year inflation in 5-years (5y5y). After President Trump was elected in November, this measure rose substantially. This increase also led to a divergence between the medi-um-term inflation expectations in US and in the euro area (green box in Exhibit 3). However, the US measure started to slowly drift lower since the strong increase in No-vember. By contrast, the euro area measure for medium-term inflation continued to in-crease until early 2017. US medium-term inflation expectations have re-converged with euro area one (red box in the exhibit). More worryingly US medium-term inflation expec-tations are currently almost back to the level prior to the election. Exhibit 3: US and EUR inflation expectations have re-converged

Source: Bloomberg, J. Safra Sarasin, 18.05.2017

While the rates market shows a fairly consistent – low Trumpflation probability – pic-ture, the FX market is more mixed. The Dollar has weakened substantially against the euro since January. Following the election of President Trump, the EURUSD exchange rate fell from 1.10 to 1.04. Since then, the euro recovered and the EURUSD exchange is currently at 1.11 above the pre-election level (see Exhibit 4).

However, the EURUSD exchange rate could also be influenced by other factors. The lower political risks in the euro area and the possibility of a less accommodative mone-tary policy by the ECB also helped the euro to strengthen against dollar. This might ex-plain the difference between the EURUSD exchange rate, where the dollar is weaker

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US medium-term inflation expectations are only marginally above the pre-election level

US and EUR inflation expectations have converged

FX market show a mixed picture about the Trumpflation trade - EURUSD is above the pre-election level …

Exhibit 4: EURUSD has strengthened through the level it was priorto the election of President Trump

Exhibit 5: USD is still above the 8 November level

Source: Bloomberg, J. Safra Sarasin, 18.05.2017 Source: J. Safra Sarasin, 18.05.2017

… but the BoE trade weighted dollar is still 2% stronger than before the election

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than prior to the election, and the effective exchange rate calculated by the Bank of England (BoE). Here, the USD is still almost 2% above the level prior to 8 November (see Exhibit 5). We prefer the BoE calculation to the DXY index since in the latter the euro is by far the largest component, and therefore, might be heavily influenced by the EURUSD exchange rate movement. The repricing of the Trumpflation trades also has significant implications for the Fed, in our view. We continue to expect only one more Fed hike in 2017. The market is gradu-ally pricing this view. At the beginning of May, it was still pricing 1.5 hikes à 25bp by year-end. The number of hikes being priced has fallen to 1.1 hikes (see Exhibit 6). The pricing of less Fed hikes this year coincided with a reduction in the probability of a June hike. June in its peak was priced with close to 85% probability in early May. Currently the probability is at 60%. Yet, with 60% the June meeting remains by far the most likely meeting for another Fed hike according to market. The probabilities for the other meetings are substantially lower. September being the second most likely candidate only has a probability of 29% (see Exhibit 7). We still see September as the more likely then June. This view could be expressed via micro money market steepeners between June and September Eurodollar contracts. If the Fed decides to postpone a hike in June, we believe the market reaction would be a strong bull steepening of the 2s10s US yield curve - a higher yield spread between bonds 10-year maturity and 2-year maturity accompanied with an overall fall in yields. Given the high uncertainty about the Fed policy outlook, we would have a neutral curve positioning, with a bias towards steepeners. Overall, we continue to expect yields to rise, albeit German Bund yields could increase significantly more than US Treasury yields. This should lead to lower a spread between 10-year US Treasuries and 10-year German Bunds. We believe this view is supported by four arguments: Strong fundamentals for the world economy, with growth in the developed and emerg-

ing markets Less political risks in the euro area and a market friendly cabinet appointed in France Likely reduction in the ECB’s aggressive monetary accommodation Likely tax cuts in Germany after the federal election in September

Number of hikes being priced by year-end 2017 has fallen to only slightly above 1

June remains the most likely meeting for another Fed hike based on the market

A dovish Fed would lead to a bull steepen-ing of the US yield curve

Continue to expect higher bond yields and tighter spread between US Treasuries and German Bunds

Exhibit 6: Market pricing for Fed hikes has fallen from 1.5 at thebeginning, in line with a drop in June hike probability

Exhibit 7: But the market still prices a June hike with 60% proba-bility

Source: Bloomberg, J. Safra Sarasin, 18.05.2017 Source: Bloomberg, J. Safra Sarasin, 18.05.2017

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Global Equity Strategy

When the trumpet sounds, investors take cover

The mud-slinging enshrouding US politics creates some market nervous-ness; a lack of reform momentum is expected to trigger more short-term weakness in US equities

Key global equity indices reversed trend close to important technical lev-els, implying a longer period of consolidation has probably started

Defensive sectors are close to start outperforming cyclical ones; Europe-an health care and consumer staples stocks look currently attractive

The new French government looks credible, even if markets might adopt a wait and see attitude in the short-term

Political newsflow took centre stage this week both in the US and in Brazil, triggering some significant knee-jerk stock market reactions. All the political and media excite-ment that followed the dismissal of FBI Director Comey ultimately impacted US equity markets, as doubts regarding the credibility and political standing of president Trump crystallized. We generally advise to take all the newsflow and rumours surrounding Donald Trump and the White House with a substantial pinch of salt. Rumours and newspapers “leaks” are not facts unless proven otherwise. The nomination of former FBI Director Robert Mueller as special counsel — de facto and de jure a full power at-torney — is expected to bring back some objectivity in the whole debate. That being said, equity investors are probably correct to anticipate that policy-making in Washing-ton D.C. is likely to grind to a halt in coming months irrespective of the investigation outcome. The S&P 500 index looks increasingly unlikely to break above its recent highs around 2’400 points before the end of the summer break, as hopes of economic reforms are pushed farther back in the future. The index should now drift lower in coming weeks and is expected to find support between 2320 and 2270 points. The DJ Transportation index is also flashing signs of warning as it broke key supports. US survey data might well disappoint as some disillusion about the vaunted economic reforms sets in. Cycli-cal sectors currently still perform on par with defensive ones (see Exhibit 2), we antici-pate however defensives to starting outperforming in coming months if the rollover in manufacturing surveys continues in the US and China, which we expect.

Cédric Spahr, CFA Equity Strategist [email protected] +41 58 317 31 28

All the flak aimed at Donald Trump should not be taken at face value …

…yet US equity markets appear ripe for some more downside in the short-term

Exhibit 1: The S&P 500 is likely to test the lower bound of itstrading range around 2’300 points as “Trump trades” lose steam.

Exhibit 2: The performance of cyclical sectors still matches de-fensives, yet we anticipate a rollover favouring defensives.


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A glance at the broader DJ Euro Stoxx index (see Exhibit 3) confirms that European eq-uities might face some short-term headwinds too, yet remain in medium-term uptrends. The German DAX also failed to exceed 12’850 points, a major technical mark. The MSCI AC Asia Pacific ex Japan index might take a breather as well, as it got near a long-term downtrend line going back to 2007. Such signals probably herald a pause in the uptrend that might last well into 3Q17. In the meantime, we advise a defensive tilt favouring for instance European consumer staples and healthcare stocks, which gave interesting technical signals in past weeks (see Exhibit 5 and 6).

Emmanuel Macron appointed a new Prime Minister and a new government, which was largely ignored by investors. Macron seems to have succeeded in blending political forces from the left, the centre and the right. The appointment of two centre-right politi-cians for economic and financial issues — Bruno Le Maire as Economy Minister and Gérald Darmanin as Budget Minister — clearly signals the president’s intention to adopt a business-friendly stance on economic issues. The latest polls suggest that Macron’s joint list for En Marche and Bayrou’s Modem movement is likely to garner 32% of votes, with the centre-right party “Les Républicains” and the Front National fol-lowing both with 19%. Mélenchon’s movement “La France “insoumise” lags with 15% and the Socialist party polls with a meagre 6%. The present trends in the polls suggest that Macron is expected to emerge with the largest political fraction after the French parliamentary election, yet is likely to fall short of an absolute majority. He might still need to strike a compromise with “Les Républicains” to govern effectively, as both the extreme left and right parties are expected to oppose his reform projects.

Exhibit 3: Many regional and sector indices hoovered close to sig-nificant technical levels when market jitters started this week.

Exhibit 4: Asia Pacific equity markets are approaching key over-head resistance and are likely to pause before breaking upward.


Exhibit 5: European health care stocks remain in a medium-term uptrend and are poised to re-test their 2015 high at 2’650 points.

Exhibit 6: European consumer staples stocks overcame resistancearound 3’480, sending a bullish signal for the medium term.


The new French government looks credible

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Emerging Markets

CEEMEA Macro Update

The near-term political uncertainty in Turkey has diminished, however longer-term concerns around government policy-making remain

The macro-economic outlook for Russia remains positive as inflations has de-clined meaningfully and the Central Bank is expected to cut rates further

The political nose in South Africa spiked recently after President Zuma removed a number of cabinet ministers, including Finance Minister Pravin Gordhan

This week, we present our updated macroeconomic views on the major CEEMEA econ-omies of Turkey, Russia, and South Africa. Turkey: President Erdogan achieved a nar-row victory in the recently held referendum leading to some reduction in political uncer-tainty. The full transition to a Presidential form of government will only take place after the next elections, scheduled for November 2019. However, we think President Er-dogan would like to push forward the transfer of power which raises the possibility of early elections. The macroeconomic picture remains somewhat weak, as inflation re-mains at an elevated level (April headline CPI came in at 11.9%) while GDP growth is expected to be stagnant. Additionally, the current account deficit is significant (around 3% of GDP) but may improve if oil prices stay stable and the country’s tourism sector picks up. Russia: GDP growth is expected to turn positive in 2017 as the economy bounces back from the recession of the last two years. Inflation has been moderating towards the central bank’s target and this lays the ground for further rates cuts through the course of the year. Further, the Finance Ministry recently announced that it will buy FX to shore up the country’s international reserves with the revenue earned from oil prices in ex-cess of $40/bbl. On the political front, the removal of western sanctions remains un-certain given the opposition US President Donald Trump is facing from congress on var-ious issues concerning Russia. South Africa: Political uncertainty has increased in South Africa after President Zuma removed a number of his cabinet ministers, including finance minister Pravin Gordhan. Subsequently, S&P and Fitch downgraded the coun-try’s sovereign rating to High Yield. We expect political noise to remain high until the ANC elective conference in December. On the macro front, GDP growth is expected to see a modest pick up this year as the drag from the Agricultural sector begins to fade. Inflation has been moderating in recent months, but still remains above the Central Bank’s target range. We expect interest rates to remain unchanged in the near-term. Spreads of CEEMEA corporates vs. their 3-year range

Source: Bloomberg, J. Safra Sarasin, 18.05.2017

100

300

500

700

900

1,100

CEEMEA Europe Middle East Africa Russia Turkey UAE South Africa

Spread (bps) 3-year range Last

Kunal Singh Emerging Market Credit Strategist [email protected] +41 58 317 31 21

Turkey’s macroeconomic dynamics remain weak with high inflation and muted growth

Russia is expected to post positive GDP growth in FY17; political noise keeps South Africa’s outlook uncertain



Economic Calendar

Week of 22/05 – 26/05/2017

Country Time Item Date Unit Consensus

Forecast Prev.

Monday, 22.05.2017 CH 09:00 M3 Money Supply Apr yoy - +2.8% 10:00 Total Sight Deposits May 19 CHF bn - 575.0 10:00 Domestic Sight Deposits May 19 CHF bn - 484.5US 14:30 Chicago Fed Nat Activity Index Apr index - 0.08

Tuesday, 23.05.2017 CH 08:00 Exports Real Apr mom - +2.5%DE 08:00 GDP sa, final 1Q17 qoq - +0.6% 08:00 GDP wda, final 1Q17 yoy - +1.7% 08:00 GDP nsa, final 1Q17 yoy - +2.9% 08:00 Private Consumption 1Q17 qoq - +0.3% 08:00 Government Spending 1Q17 qoq - +0.8% 08:00 Imports 1Q17 qoq - +3.1% 10:00 Ifo Business Climate May index - 112.9 10:00 Ifo Expectations May index - 105.2 10:00 Ifo Current Assessment May index - 121.1US 16:00 New Home Sales Apr 1 000 620.0 621.0

Wednesday, 24.05.2017 CH 09:15 Industrial Output 1Q17 yoy - -1.2%EMU 10:00 PMI Manufacturing, prel. May index - 56.7DE 08:00 GfK Consumer Confidence Jun index - 10.2 00:00 Import Price Index Apr mom - -0.5% 00:00 Import Price Index Apr yoy - +6.1%US 15:00 FHFA House Price Index Mar mom - +0.8% 15:45 PMI Manufacturing, prel. May index - 52.8 15:45 PMI Services, prel. May index - 53.1 16:00 Existing Home Sales Apr USD m 5.67 5.71 20:00 FOMC Meeting Minutes May 3 index - -

Thursday, 25.05.2017 US 14:30 Initial Jobless Claims May 20 1 000 - - 14:30 Continuing Claims May 13 1 000 - - 15:45 Consumer Comfort May 21 index - -

Friday, 26.05.2017 US 14:30 GDP 1Q17 qoq +2.3% +2.3% 14:30 Durable Goods Orders, prel. Apr mom -1.5% +0.9% 14:30 - Less Transportation, prel. Apr mom +0.3% 0.0% 14:30 Capital Goods Orders, prel. Apr mom - +0.5% 16:00 U. of Mich. Expectations, final May index - 88.1

Source: Bloomberg, J. Safra Sarasin



Market Performance

Global Markets in Local Currencies

Government Bonds Current value Δ 1W Δ YTD TR YTD in %

Swiss Eidgenosse 10 year (%) -0.10 -4 9 -0.2

German Bund 10 year (%) 0.37 -3 16 -0.5

UK Gilt 10 year (%) 1.09 1 -15 2.2

US Treasury 10 year (%) 2.25 -8 -20 2.7

French OAT - Bund, spread (bp) 44 -1 -4

Italian BTP - Bund, spread (bp) 175 -11 14

Spread over govt bonds

Change in credit spread Credit in-

dex

Credit Markets (bp) Δ 1W Δ YTD TR YTD in %

US Investment grade corp. bonds 65 -2 3 3.1

EU Investment grade corp. bonds 63 0 9 0.6

US High yield bonds 338 -10 17 4.3

EU High yield bonds 255 2 33 2.7

Stock Markets Level P/E ratio 1W TR in % TR YTD in %

SMI - Switzerland 9'009 18.0 -1.4 12.2

DAX - Germany 12'641 14.0 -1.0 9.7

MIB - Italy 21'483 15.0 -0.9 11.5

IBEX - Spain 10'779 14.9 -1.6 15.8

DJ Euro Stoxx 50 - Eurozone 3'584 15.2 -1.3 10.4

FTSE 100 - UK 7'469 15.2 0.9 6.1

S&P 500 - USA 2'366 18.2 -1.1 6.5

Nasdaq 100 - USA 5'626 21.0 -0.8 16.3

Nikkei 225 - Japan 19'591 17.2 -2.0 3.1

MSCI Emerging Markets 988 12.6 -1.2 15.3

Forex - Crossrates Level 3M implied volatility

1W in % YTD in %

USD-CHF 0.98 7.1 -2.4 -4.2

EUR-CHF 1.09 4.7 -0.4 1.7

GBP-CHF 1.27 6.9 -1.5 1.0

EUR-USD 1.12 7.1 2.1 6.1

GBP-USD 1.30 7.5 0.9 5.4

USD-JPY 111.5 9.1 -1.7 -4.7

EUR-GBP 0.86 7.2 1.2 0.5

EUR-SEK 9.79 5.9 1.4 2.2

EUR-NOK 9.38 7.6 0.3 3.3

Commodities Level 3M realised

volatility 1W in % YTD in %

CRB Commodity Index 433 8.1 4.9 2.5

Brent crude oil - USD / barrel 53 25.6 4.7 -4.9

Gold bullion - USD / Troy ounce 1'253 12.1 2.0 9.2

Source: J. Safra Sarasin, Bloomberg


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