The euro zone delivered better-than-expected growth data, finally indicating an end to the recession after six quarters. We maintain our over-weight in European equities in light of this positive development. Political tensions caused by a …
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Swisscanto Investment Update September 2013
possible US military intervention in Syria, as well as the poor state of emerging markets in currencies and bonds, cause us to approach September with slightly less risk.
In September, the US Federal Reserve is expected to start the announced ‘tapering’ process, gradually reducing its quantitative easing programme. So far, each month the Fed has been buying bonds for the equivalent of USD 80 billion; it is now expected that ‘only’ USD 60 billion will be bought. Given the uncertainty and the rapid rise in yields, which was triggered merely by the announcement of limiting bond purchases, the Fed will only be able to move forward in reducing its liquidity supply in small steps. The US monetary policy will therefore remain expansionary for the time being, not least because widespread optimism regarding US economic growth may be excessive. The latest US economic data already suggests that this is the case.
Euro zone: recession finally at an end
The euro zone was able to exit the recession in the second quarter of 2013 thanks to positive growth contributions from Germany and France. Italy and Spain are still in recession, but the growth differential has decreased significantly. It is expected that these countries will also come out of recession in the second half of the year. In light of this positive development, Spanish and Italian government bonds recorded further gains. Spreads on German Bunds fell to their lowest level in three years. Parliamentary elections are due to take place in Germany on 22 September, which will once again deliver our neighbours a government under the leadership of Angela Merkel; the question of who the coalition partner will be is still open.
Emerging markets: the new problem children
Emerging markets have more or less seamlessly replaced Europe in the role as problem children of the markets. Ever since the US tapering policy was first announced, numerous emerging markets have been affected by large capital outflows, whereas previously they had clearly been benefiting greatly from the abundance of liquidity. Emerging market bonds, which have several years of very good performance behind them, will be among the losers this year. Various emerging market currencies are also being exposed to considerable pres-sure; this is mainly affecting countries with high trade account deficits: primarily Turkey, South Africa and India, but also Brazil and Indonesia. Given the persisting structural imbal-ances, we assume that the capital outflows from emerging markets will continue for the time being. We are therefore reducing our position in emerging market bonds significantly.
Crude oil: climbing prices due to Syria conflict
Recurring crises in the Middle East reflexively trigger a rise in crude oil prices. And so it is this time. The price of Brent crude oil has jumped to its highest level for several months. Although we consider crisis scenarios such as closure of the Suez Canal to be exaggerated, we feel that further increases in the price of oil are likely and therefore we are slightly strengthening our position in commodities. Crude oil is being used as a hedge in case the equity markets should come under pressure in the face of an escalation of the Syrian conflict.
Source: ETFWorld – Swisscanto
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