july 2009
anticipations Monthly
Written by Philippe Waechter, Chief Economist of Natixis Asset Management
Our macroeconomic analysis In June, positive signs on the global economy were increasingly prevalent. After having suffered the negative shocks of the 2008 second half, the global economy had gone into freefall. It is now starting to stabilize or even improve but at different rates depending on the region. In China and the United States, economic activity now looks to be more positively oriented thanks to the pro-active policy responses implemented by governments. In the Euro zone, however, the conditions enabling a recovery in economic activity are still not in place due, notably, to economic policies which are proving poorly coordinated and too limited in scale. • In the United States, the signs generally seen during an exit from recession are increasingly prevalent. Activity continues to contract but at a much slower pace than during the first quarter while jobs destruction is becoming more moderate. In the manufacturing sector, the considerable adjustment in inventories together with the marked rebound in new industrial orders (including export orders) both constitute strong signals presaging a recovery in activity. As for households, the significant improvement in consumer confidence since March and, more specifically, in their expectations is a positive signal for their future behaviour.
• In China, activity is rebounding after a significant slowdown during the 2008 second half. The reorientation of the economic stimulus package towards the domestic market is thus bearing fruit. The improvement in Chinese internal momentum is stimulating regional trade and is already benefiting a number of countries in the Asian region like South Korea, Taiwan and Japan. • In the Euro zone, the situation is more complex. Business confidence surveys are more positive due to the perception of an improvement in the international environment. However, the limited momentum in orders does not point to a rapid recovery in activity. With global trade flows having declined since the autumn of 2008, the 'traditional' cyclical impulses based on the acceleration in exports are no longer functioning. Furthermore, the high level of the euro is penalizing exports, hence the increased dependence on domestic momentum. The latter lacks homogeneity in that some growth models look compromised (in Spain, Ireland, etc.) while governmental stimulus packages are proving too inadequate and too poorly coordinated to generate a strong and sustainable recovery in activity.
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anticipations Monthly july 2009
Our market analysis The markets have been volatile over the past month. Whereas, as of March, investors reacted positively to the publication of economic indicators pointing to an exit from recession for the US economy from the summer, they became more hesitant during June.
n Money market In a low-inflation environment, the central banks have maintained their interest rates at a very low level and will leave them unchanged for some time to come. The Fed, the Bank of England and the Bank of Japan are seeking to boost the effectiveness of their monetary policies in continuing to purchase government bonds and other assets. The ECB prefers to flood the money market with liquidity, the aim being to improve liquidity in the short-term financial markets while reducing the constraints weighing on the financial institutions and the banks. On June 24, it thus loaned â‚Ź442 billion to more than 1,100 banks at an interest rate of 1% for a one-year period (an unprecedented duration). In deploying such instruments and in its policy response, the ECB is not seeking to stimulate growth directly unlike its US or UK counterparts.
n Bond markets The bond markets have seen significant volatility over the past month. Given the expected stability in monetary policies, we might well have seen relatively stable markets, with switching into more risky assets weighing a little but not excessively on interest rates. However, this scenario was swept aside with the publication of better-than-expected US jobs figures in early June, suggesting a more rapid change in monetary policy than had been expected. Investors temporarily discounted an increase in US interest rates at the year end, leading to a tightening across the yield curve in both the United States and Europe. This soon fizzled out, however, with rates again easing as of mid-June.
The statement from the Federal Reserve following its monetary policy committee meeting of June 24 also contributed to reducing these strains in indicating that it did not envisage any rapid shift in monetary policy. This more positive situation in the bond markets is synonymous with reduced constraints in terms of financing the economy.
n Equity markets The equity markets witnessed contrasting trends, with the US markets enjoying a modest rise while the European markets saw a correction. The overall optimism which had characterized the stock markets as of March finally give way to a period of doubt and uncertainty, with investors preferring to await the publication of figures showing a real recovery in US activity.
n Currency market The currency markets remained relatively stable last month in the absence of any clear directional signals. This was particularly the case for the dollar which had seen a period of depreciation as of March, during which the marked reduction in risk aversion linked to the signs heralding a rapid exit from recession for the US economy had led investors to switch out of the green back into assets offering higher yields.
n Commodities The oil price remained high in June despite the weakness in global demand and the high level of stocks. This was due to speculative phenomena.
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Written on 07/09/2009
anticipations Monthly july 2009 Our asset allocation bias We remain ‘neutral’ on the bond market and are turning ‘negative’ on equities. Risk categories
Risk subcategories
Tactical allocation*
Commentary
June 09(1) July 09(2)
Fixed income
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We remain ‘neutral’. Continued highly accommodative monetary policies and reduced inflationary risks will see interest rates remain at around their current levels. We are, however, turning negative on UK bonds at the long end.
Equities
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We are turning ‘negative’ due to the expected trend in the European market.
United States
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We are turning ‘negative’. The possibility of a stronger-than-expected recovery could generate tensions at the long end.
Euro
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We remain ‘neutral’. The ECB should leave its interest rates unchanged and the mediocre activity outlook will not generate any upwards pressure on yields.
UK
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We are turning ‘negative’. The possibility of a more rapid than expected recovery is likely to prompt the beginning of a normalization in UK long-term interest rates.
Japan
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Corporate
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We remain ‘positive’. Primary market flows remain strong as does investor appetite and the valuation is still attractive even though yields are gradually declining.
United States
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We remain ‘neutral’. The markets have priced in the prospect of an exit from recession for the US economy as of the summer and valuations are not particularly attractive.
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We are turning ‘neutral’: the oil price should stabilize around current levels given the sharp increase seen since March.
Fixed income
Emerging countries
Euro issuers
Equities
Euro UK Japan Dollar
currencies (against the euro)
Yen Pound Sterling
Commodities
Oil Gold
We remain ‘neutral’. We remain ‘neutral’.
We are turning ‘negative’. The equity markets could be impacted in the short term by worrying corporate earnings reports. We remain ‘neutral’. We are turning ‘positive’ given the strong rebound in Japanese activity. ‘Neutral’: the euro/dollar parity should stabilize. ‘Neutral’: the yen should stabilize relative to the euro. ‘Neutral’: Sterling should stabilize.
We remain ‘neutral’.
Scale from -- to ++
*weighting gap vs. strategic allocation of an investor
(1) Investment committee on 05/28/2009. (2) Investment committee on 06/25/2009. This document is intended for professional clients. None of the information contained in this document should be interpreted as having any contractual value. This document is produced purely for the purposes of providing indicative information. It constitutes a presentation conceived and created by Natixis Asset Management from sources that it regards as reliable. Natixis Asset Management reserves the right to modify the information presented in this document at any time without notice. This document does not in any way constitute a
commitment on behalf of Natixis Asset Management. Natixis Asset Management will not be held responsible for any decision taken or not taken on the basis of information contained in this document, nor in the use that a third-party may make of it. This document may only be copied for information purposes, and all copies are strictly for personal use. It may not be used, reproduced, distributed or communicated to third parties in part or in whole without the prior written authorization of Natixis Asset Management.
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