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Global Markets Strategy Outlook Summary

Core Content Overview

This document outlines the Global Markets Strategy Outlook for 2017, authored by Robert McAdie, Head of Research and Strategy at BNP Paribas, with contributions from various analysts across the firm. It covers global market themes, trade recommendations, and forecasts for G10 rates, FX, Emerging Markets (EM), Equities, Credit, and Commodities.

Main Themes for 2017

Theme 1: Global Yields to Rise, Unwinding the Carry Trade

• Context: The "search for yield" driven by central bank liquidity is ending.
• Expectations: Global yields (both nominal and real) will rise, especially in the US.
• Impact: Equities and credit will become less attractive as yields rise, leading to a correction in risky asset classes.
• Key Indicator: A move in USD real yields above 50bp will signal a broader risk-off shift.

Theme 2: Dispersion to Rise Across Sectors and Markets

• Reason: Reduced reliance on central bank liquidity and increased macroeconomic uncertainty.
• Impact: Correlation across asset classes will fall, and investors will need to focus more on fundamental analysis.
• Examples: Commodity prices and equity sectors are expected to disperse more, with a greater emphasis on name, asset, and sector selection.

Theme 3: US and Eurozone Rates to Impact EM Differently

• US Impact: Rising yields and inflation will reduce USD liquidity, pressuring EM assets.
• Eurozone Impact: Higher yields and political risk will increase risk premia, particularly for peripheral economies.
• Recommendation: EM will underperform, but Brazil and Indonesia may offer opportunities.

Theme 4: USD to Reach New Highs

• Reason: Divergence in monetary policy between the US and other G10 economies.
• Forecasts: EURUSD to reach 1.00 and USDJPY to reach 128.
• Impact: Strong USD will constrain commodity prices, especially oil and gold.

Theme 5: Eurozone Risk Premia to Rise

• Reason: ECB tapering and rising sovereign credit risk.
• Recommendation: Short 3/10s BTP/SPGB box and focus on shorter expiry implied volatility.

Trade Recommendations

G10 Rates

• 10y EUR swap payer: Target 1.0%, stop 0.48%, current 0.64%.
• Sell 10y US Treasury: Target 3.00%, stop 2.00%, current 2.31%.
• Short 5y JGB: Target entry -0.12%, current -0.10%, stop -0.21%.
• 2s10s GBP swap steepener: Target -20bp, stop -9bp, current 68bp.

G10 FX

• Long USDJPY: Target 128.00, stop 110.00, current 112.50.
• Long GBPJPY: Target 160, stop 135, current 141.
• Short NZDUSD: Target 0.65, stop 0.7180, current 0.71.

Emerging Markets

• Buy protection on CDX EM: Target 90, stop 93.5, current 92.25.
• Short SGD vs IDR via 12m NDF: Target 9500, stop 10750, current 10250.
• Long BRL against EUR, AUD, CLP: Target +10%, stop -5%, current 198.59/3.604/2.5396.
• Receive rates in Jan-25 in Brazil: Target 11.36%, stop 12.62%, current 12.13%.

Equities

• Long global fiscal spend basket: Target +15%, stop -5%.
• Long US small caps vs large caps: Target +10%, stop -5%.
• Long eurozone equities, short EM equities: Target +17%, stop -5%.

Credit

• Short iBoxx HY Index / Long Leveraged Loans: Target 0bp, stop -84bp, current -64bp.
• Long Gamma positions via Long Payers in iTraxx Main and Fin Sen: To hedge against volatility in Europe.

Commodities

• Oil: Buy downside protection. Recommend short Brent time spreads and long WTI Jun'17 40 puts.
• Gold: Sell upside due to strong USD and rising yields. Recommend short Jun'17 1350 calls and short Dec'17 1300 calls.

Key Forecasts

Conclusion

The outlook for 2017 is marked by rising yields, increased volatility, and divergence in monetary policies. Investors are advised to prepare for a risk-off environment, focus on fundamental analysis, and consider diversified strategies across asset classes. Emerging Markets are expected to face headwinds, while US and eurozone assets will benefit from higher yields and tighter liquidity. USD is forecast to strengthen, impacting global commodity prices and EM currencies. The report emphasizes opportunities in specific markets such as Brazil, Japan, and UK inflation assets, and highlights the need for disciplined and prepared investment strategies.