20170503-法国巴黎银行-Global_Markets_Head_of_Strategy_22页_1mb

BNP PARIBAS MARKETS CALL Summary

Core Content

This report from BNP Paribas Markets Call provides a weekly cross-asset market view for May 3, 2017, focusing on the outlook for risky assets, global economic data, emerging markets (EM), and the implications of US interest rates and dollar movements.

Main Points and Views

1. Market Outlook

• The current economic backdrop is healthy, with no immediate risks to the market situation.
• US earnings have exceeded expectations, driven by energy and technology sectors, supporting US equities.
• European stocks are preferred over US equities due to narrowing valuation gaps.
• US real yields are expected to rise, supporting the USD and leading to a broad trade-weighted dollar increase of at least 10% by year-end.

2. Interest Rates and Term Premium

• Global interest rates are too low and are expected to rise, with the Fed likely to increase rates twice in 2017.
• Term premium is expected to increase due to discussions on Fed balance sheet reduction.
• A rise in US long-term yields will have a more significant impact on EM than short-term rate changes.
• EM spreads will be affected by higher US real yields and Fed rate hikes.

3. Emerging Markets (EM) Performance

• EM equities are performing well, with strong inflows and momentum expected to continue.
• EM assets are in a sweet spot, supported by improving economic data, strong investor inflows, and low rates.
• Valuations in EM are expensive, making them more sensitive to USD and real yield movements.
• EM FX carry trade remains attractive, but risk-adjusted carry is more important than yield alone.

4. EM Valuation Opportunities

• EM bond yields are more attractive relative to their credit ratings, especially in Brazil.
• Asian equity markets are the most fairly valued based on Equity Risk Premium (ERP).
• Chinese stocks are fairly priced, with low risk in the short term.
• Korean stocks are at their cheapest levels relative to local bonds since the 2007 crisis.

5. EM FX Carry and Risk

• EM FX carry trade is attractive, but high-yield currencies may not be the best for long positions.
• The drop in FX reserves suggests China is intervening to limit USD rally, which may help in trade negotiations.
• EM performance is sensitive to long-end US rates, more than to Fed Funds rates.

6. Trade of the Week

• Brazil DI Jan-20 is recommended with a target of 9.0%, stop loss at 10.10%, and an allocation of USD15k DV01.
• The belly of the curve is preferred over the long end to reduce risk and capitalize on higher terminal Selic rates.

Key Information and Insights

• Economic Data: Global PMIs are supportive, with EM PMIs recovering slowly and unevenly. China's recent data are encouraging, and the RMB has eased from pressure.
• Valuation Gaps: EM valuation gaps relative to the US are narrowing, making European equities more attractive.
• USD Liquidity: A stronger USD will reduce liquidity for EM, acting as a headwind due to its impact on cross-border lending.
• Leverage Risk: EM leverage is high, especially in Asia, and any contraction in USD liquidity could pose a risk.
• Political Risk: Political tensions are a concern for EM, particularly in countries like Brazil and Korea.
• Term Premium: The 10-year term premium is expected to rise as the Fed discusses balance sheet reduction, affecting EM yields and spreads.

Tables and Charts Summary

Conclusion

BNP Paribas remains positive about the market outlook for the next month, with a focus on EM and the USD. The report highlights the importance of term premium and the impact of US rate hikes on EM. While EM is in a favorable position, the rising USD and real yields may pose challenges. The recommended trade is in Brazil DI Jan-20, with a target of 9.0%. The report also emphasizes the role of leverage and FX carry in EM performance and the need for careful positioning in light of these factors.