April saw the US 10-year Treasury yield breaking above 3 per cent for the first time since 2013, whilst the earnings season broadly sent a positive message on corporate profitability. With Trump toning down his protectionist rhetoric and the US dollar rebounding from a 4-year low, equity markets were strong in Europe and the UK, but failed to deliver in the US.
Fourth hike remains likely in our view but linked with potential upside-risk either from inflation or wage growth.
Going into May we remain neutral on rates in core markets, as the current macroeconomic backdrop does not provide the catalyst for a sharp increase in yields. Moderation in economic activity in both Europe and the UK, together with limited threat on the inflation front, has brought yields back to levels not seen since the end of last year. In the US, the picture is slightly different, as higher rates are supported by: strong macroeconomic numbers; a tight labour market; steadily rising inflation; and a tailwind from tax reform. We do, however, see a gradual normalisation path in-line with the Fed’s projected rate hikes. A fourth hike remains likely in our view but linked with potential upside-risk either from inflation or wage growth. With regards to credit, we are positive on global high yield, noting that the synchronised global growth story remains intact and carry collection is the only game in town.
Strong equity gains were posted in Europe and the UK, partially owing to currency weakness but also as trade war fears have subsided.
Turning to equities, the strong earnings season does not seem to have helped US equities, where short- term strength in the US dollar and concerns around technology shares, resulted in flat returns for US benchmark indices over the course of the month. However, strong equity gains were posted in Europe and the UK, partially owing to currency weakness but also as trade war fears have subsided. Going forward, we reinstate our positive view on European equities as we expect the recent moderation in economic activity to be transitory and the earnings season to provide further fuel to the recent rally. We are positive on UK equities as well, with a preference towards income stocks, as the recent Sterling volatility and a pick-up in real wage growth could provide further upside. We are neutral on US equities, as their recent failure to respond positively to strong corporate and macro data suggest that markets are discounting an upcoming moderation in the economic activity, or at least some cautiousness.
On commodities and emerging markets, we continue to prefer the agricultural segment and maintain an exposure to India, South Korea, and Singapore. As always, a small allocation to precious metals adds diversification to any multi-asset portfolio, especially for those investors who are sceptical about the resilience in equity markets.