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BNP PARIBAS MARKETS CALL Summary

Core Content

BNP Paribas Markets Call provides a weekly cross-asset market view for the eurozone and global markets, highlighting the firm's positive outlook for the region despite political and trade-related risks. The report outlines the current economic and financial conditions, inflation expectations, currency dynamics, and equity market performance across various sectors and countries.

Main Points

• Eurozone Outlook: Despite headwinds from politics and trade tensions, the eurozone's growth remains above potential, and the output gap is expected to narrow. This supports the view of higher interest rates by the end of 2018.
• Inflation and Rates: The report suggests that inflation breakevens in both the US and Europe are not fully priced in, and the recent increase in OPEC production is unlikely to prevent a rise in oil prices. The 10-year yield in Europe is expected to rise, steepening the yield curve and reducing the spread with the US.
• FX Outlook: EURUSD is expected to rise, with a pivotal support level at 1.1520. However, trade tensions could pose a risk to this outlook. The report favours a bullish EURUSD position, supported by the end of ECB quantitative easing and improved economic data.
• Equities: Eurozone equities, especially small and medium-sized companies, are viewed as more resilient due to their domestic focus. The report recommends a long position in the BNPP eurozone small and mid-cap basket, highlighting the underperformance of the broader indices and the potential for sector rotation.
• Credit and CDS: The report notes that European IG CDS spreads have widened, but the overall systemic risk from Italy remains limited. It also suggests that the spread between CDS and cash is narrowing.
• Trade of the Week: The firm recommends a long position in the BNPP eurozone small and mid-cap basket, which has shown strong performance over the past year.

Key Information

Market Outlook

• Eurozone: Positive despite political and trade tensions. Growth is still above potential, and the output gap is expected to narrow.
• US: Economic data remains strong, with strong earnings growth and a positive outlook for equities.
• Global Markets: Trade tensions have increased equity market volatility, but strong fundamentals in the US and improving data in the eurozone offer some support.

FX Forecast

• EURUSD: Expected to rise, with a key support level at 1.1520. A bullish outlook is maintained, though trade tensions could cause the pair to fall.
• Other Currencies: Asian currencies like KRW and TWD are considered oversold due to trade tensions, while the USD remains strong against the euro and other currencies.

Equities

• Sector Preferences: Financials and energy are favoured, while utilities and autos are viewed as underperforming.
• Country Views: France, Italy, and Spain are seen as positive, while Germany and the UK are more exposed to trade tensions and may underperform.
• Performance: The BNPP eurozone small and mid-cap basket has outperformed the broader indices, with a return of nearly 10% over one year.

Credit and CDS

• Systemic Risk: Limited for now, with CDS prices appearing wide relative to bond spreads.
• IG CDS: Expected to tighten as bond spreads improve, though the spread between CDS and cash is still a concern.

Rates

• 10y Yields: Expected to rise in Europe, supported by improving economic data and the end of ECB quantitative easing.
• Interest Rate Hikes: The first rate hike is fully priced for June 2020, with a gradual increase in bond supply and a steepening yield curve.

Chart Highlights

• PMI and GDP: Composite PMI and real GDP growth show signs of improvement.
• Capacity Utilisation: Close to pre-crisis levels, indicating a tightening of capacity in the eurozone.
• Financial Conditions: Tightening in the eurozone, with a focus on equity price growth and corporate spreads.
• FX Positioning: Large short EUR positions are present, which could lead to a rebound if EURUSD rises further.
• Equity Performance: SX7E has underperformed SX5E, but small and mid-cap companies have shown resilience.

Trade Recommendations

• Long BNPP Eurozone Small and Mid-Cap Basket: This basket combines macroeconomic and bottom-up views, offering a strong performance in the context of a stronger domestic outlook.

Summary Table

Conclusion

BNP Paribas maintains a positive outlook for the eurozone, despite short-term challenges. The firm recommends a bullish EURUSD position and favours European small and mid-cap equities. The report also highlights the importance of monitoring trade tensions and the potential for higher rates in the eurozone.