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BNP PARIBAS MARKETS CALL: Summer Positioning Summary

Core Content

This document provides a comprehensive market outlook from BNP Paribas for the summer period, focusing on asset allocation across equities, government bonds, credit, and foreign exchange (FX) markets. It highlights the impact of central bank policies, inflation trends, trade tensions, and global economic conditions on various asset classes.

Main Views and Key Insights

Asset Allocation: Positioning for the Summer

• Central Banks' Dovish Stance: The current dovish stance by major central banks is extending the economic cycle and compensating for market uncertainty.
• Volatility and Funding Costs: The sharp drop in nominal and real yields is pushing both volatility and funding costs lower.
• Carry Trade Positions: The firm has upgraded its carry trade positions due to the environment.
• Bond Investors: Expected to benefit the most from the dovish shift by the Fed and ECB.
• Yield Curve Compression: The yield curve is compressed, especially in the US, and the firm prefers spread products over longer dated bonds.
• US IG Credit: Expected to benefit from the yield pick-up, pushing the IG credit curve tighter and flatter.
• EU HY Credit: Preferred over US HY due to lower volatility and dispersion.
• EM Equities: Expected to continue benefiting from strong inflows, lower local rates, and lower PE ratios.
• Dollar Outlook: The dollar is expected to remain in the current range with a weakening bias over time due to Fed rate cuts and narrowing growth differential.
• Gold and Oil: Both are supported by lower interest rates and geopolitical tensions; gold is expected to benefit from the low rate environment, while oil prices, particularly Brent, are expected to rise due to supply constraints.

Economic Outlook

• US Economy: Still strong with supportive financial conditions, but trade tensions are a major headwind.
• Europe: Sluggish but supported by an accommodative ECB. Weak growth and trade issues could affect the auto and airline industries.
• Inflation Expectations: Very low across the board, with real yields continuing to drop.
• Growth Differentials: The narrowing of the growth differential between the US and the rest of the world is expected to weaken the dollar.

Market Positioning

• FX: Neutral on USD and EUR, with a preference for long JPY and short GBP.
• Equity Markets: Neutral on global equities, with a preference for EM equities due to better value and inflows.
• Government Bonds: Marginal overweight on duration and peripherals, with a strong overweight on EM local and hard currency bonds.
• Credit Markets: Marginal overweight on US IG and EU HY credit, with a underweight on leverage loans due to rising downgrade risks and poor liquidity.

Key Information

Central Bank Policies

• Fed: Expected to cut rates further, supporting the dollar and creating a favorable environment for EM assets.
• ECB: Expected to cut rates twice by the end of 2019 and potentially resume QE, supporting European equities and credit.
• EM Central Banks: Likely to adopt dovish policies, which should continue to support EM assets.

Interest Rate Outlook

• Global Dovish Environment: Broad expectations of much lower rates, with the Fed and ECB leading the trend.
• US Real Yields: Significantly dropped, supporting EM assets.
• Eurozone Real Yields: Near record lows, supporting EU HY credit.

Volatility and Risk

• Equity Volatility: Expected to remain low due to dovish central banks, but trade tensions could increase uncertainty.
• EM Volatility: Low volatility environment supports EM assets.
• HY Dispersion: Rising dispersion in HY credit, with weaker credits underperforming.

Market Prognosis

• Short Term Prognosis:
  • EURUSD: 1.1300 (up 0.78%)
  • GBPUSD: 1.2300 (down 0.96%)
  • USDJPY: 107.00 (down 1.16%)
  • 10y Gilt: 0.70% (down 0.12%)
  • 10y Bund: -25 bp (unchanged)
  • 10y Tsy: 2.00% (down 0.12%)
  • 10y JGB: -5 bp (up 7bp)
  • S&P 500: 3,000 (down 0.2%)
  • SX5E: 3,550 (up 0.81%)
  • FTSE 100: 7,650 (up 0.96%)
  • Gold: 1,450 (up 2.93%)
  • Oil (CL1): 60 (up 1.78%)

Conclusion

The BNP Paribas Markets Call for the summer suggests a dovish environment across global markets, with a focus on carry trades, particularly in EM bonds and equities. The firm remains cautious about trade tensions and the potential impact on European economies, while maintaining a neutral stance on the USD and EUR. Overall, the market outlook is positive for EM assets and certain credit segments, with a focus on duration and yield plays.