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BNP Paribas Markets Call Summary - January 18, 2017

Core Content

This report provides a weekly cross-asset market outlook from BNP Paribas, focusing on economic data, market sentiment, and investment opportunities in 2017. It highlights the ongoing reflation trade, the impact of political events, and the role of interest rate dynamics on asset prices.

Main Views

• Global Economic Sentiment is Strong: Economic data and sentiment are improving globally, particularly in the US and Europe, with upside surprises in growth and inflation.
• Reflation is Real: The US economy is showing signs of recovery with less slack in employment and rising consumer confidence.
• Market Pricing is Optimistic: Despite the positive economic outlook, markets are already pricing in a more optimistic growth rebound, which may lead to a correction if the actual pace of implementation is slower.
• Term Premium and Asset Valuations: The US 10-year term premium is a key driver of risky asset valuations. A decline in term premium has supported assets, but an increase could lead to volatility.
• Eurozone Growth is Strong: The Eurozone is experiencing a recovery, but political uncertainty remains a key risk, especially with upcoming elections.
• Currency and Yield Dynamics: EURUSD is expected to remain weak in the medium term, while real yields are declining in both EUR and USD, supporting risky assets.
• Credit and Equity Risks: Political and ratings risks in Italy have diminished, leading to potential compression in corporate spreads. However, EM markets are expected to show more dispersion due to varying economic conditions and US policy impacts.

Key Information

Economic Outlook

• US: Reflation is evident, with strong data and improving sentiment. However, the market may be overpriced, and the actual implementation of Trump policies could be slower than expected.
• Europe: Economic data is improving, and the recovery is on track. Political events could remove uncertainty premiums in Q1, but the ECB's asset purchase programme may lead to higher yields in H2.
• Emerging Markets (EM): EM economies are showing recovery, but they face headwinds from higher real yields, a stronger USD, and potential trade barriers due to US policies.

Asset Performance

• Equities: S&P 500, Euro Stoxx 50, and other indices are showing mixed performance, with some indices expected to correct.
• Commodities: Oil prices are expected to rise, supporting EM and the US economy. Gold may weaken if inflation rises are temporary.
• Credit: Corporate credit spreads are compressing, with Italian government bonds and larger banks showing potential for further tightening. EM credit may see more dispersion.

FX Volatility

• FX volatility is currently neutral, with a focus on the US dollar and EURUSD dynamics. The market is waiting on the implementation of Trump's policies and the impact on the US economy.

Market Factors

• Term Premium: A significant factor affecting asset valuations, particularly in the US.
• Inflation: Expected to rise, with base effects already priced in. Real yields are declining, supporting risky assets.
• Political Risk: In Europe, political uncertainty is a key risk, especially in France and Germany.

Key Dates

• January 2017: ECB meeting, US President inauguration, French primaries.
• February 2017: Federal Reserve meeting.
• March 2017: ECB meeting, Netherlands general election, Germany state election.
• April 2017: French presidential election, ECB meeting.
• May 2017: Federal Reserve meeting, French presidential election, Germany state elections.
• September 2017: Germany federal election, potential Catalan independence referendum.

Trade of the Week

• Long Risk Italy / Short Risk iTraxx Main: Italian government bond spreads are expected to catch up with corporate spreads. The implementation of Trump's policies and ECB's actions are expected to support this trade.
• Implementation Strategy: Using a 1x Italy vs 2x iTraxx Main via CDS, or going long 10y BTPs vs Bunds.

Dial-in Numbers

• Live Call Details: Available at the back of the document, with the password "The BNP Paribas Markets Call".
• Dial-in Numbers by Country: Provided for various countries, including toll-free and local numbers.

Legal Notice

• This document is a marketing communication and not investment research.
• It is intended for Professional Clients and Eligible Counterparties.
• BNP Paribas does not offer investment, financial, legal, or tax advice.
• No liability is accepted for any losses arising from reliance on the document's content.