rearview mirrorGoldilocks: let’s start with this assumption. Once again, in March and during the entire first quarter, we had the proof that the current environment is characterized by a level of growth that is not too hot or too cold. In particular, as already highlighted in the past, the reflation trade has begun late in the summer of 2016 and then revitalized by the election of Donald Trump. Focusing on the 10-year Treasury yield we can unsurprisingly realize that the range in last 3 months was between 2.3% and 2.63%. We are now dealing with a 2.39% yield to maturity for a 10-year Treasury even if Boston Fed’s Eric Rosengren together with San Francisco Fed’s John Williams lately pointed out that four hikes could be justified by the end of the year. The reality is that the market participants are embracing a more dovish stance from the FED. Overall New York Fed’s William Dudley, by defining “reasonable” three hikes in 2017, is picturing a situation where the risk of overheating is very low.

goldilocksOn the other end, in Europe as well, it seems that there is a lot of uncertainty about next steps from the ECB. Although Mario Draghi, during last press conference started to prepare the market about the idea of less incisive help from the European Central Bank, an official statement by the end of March provided a different picture, surely a more dovish one. Investors have misinterpreted policymakers.

I look at this narrative suspiciously. It seems like that the ECB power of clear communication is disappearing or, saying better, that European policymakers are miming the FED colleagues’ in their way to leave the market participants in a foggy expectation outlook.

The political uncertainty in Europe is dissolving as well. France election is no more inflating any concerns. By consequence European indexes closed the month in a better shape compared to the “tired” US equity indexes. The new financial theme is a renewed interest for European Stocks, cheaper in their evaluation relative to US ones. This has been helped in their last run by the sustain of inflows. According to Bank of America Merrill Lynch, during the past week, investors preferred to invest in European stock funds, that registered inflows for $1.9 billion rather than their U.S. counterparts have been impacted by $800 million of outflows.

The same story holds for the credit space: the gap between the two areas is going to reduce, signalling only 27bps between the EUR and USD iBoxx Investment Grade.BREXIT_01

The month was also full of political “non-events”.  The vote against the Trumpcare and the Article 50 that officially triggered the Brexit had no financial consequences. A small correction of equity indexes seems to appear as a buying opportunity. This is in line with a perfect Goldilocks scenario and whether we won’t face with higher inflation and higher government yields, investors will continue to buy bonds and bond like equity. A continuing sector rotation, as well as a regional rotation, will probably support risky asset for the short term future.

 

Christian Zorico: LinkedIn Profile

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Ha conseguito il Master of Quantitative Finance and Risk Management (MAFINRISK) presso l’Università Bocconi nel 2005 dopo essersi laureato in Economia degli Intermediari Finanziari presso la stessa Università. Inizialmente ha svolto attività di ricerca e tutoring per i corsi di Portfolio management e Applied Econometrics presso l’Università Bocconi tenuti dal Professor Andrea Beltratti. In seguito ha avuto modo di consolidare le nozioni tecniche ed applicarle sul campo durante l’esperienza come quantitative analyst e risk manager in un Hedge Fund con strategia macro e successivamente ricoprendo la posizione di gestore di portafoglio e fund manager con mandato flessibile per una banca privata svizzera e un gestore di fondi. L’area di interesse è da sempre il mondo fixed-income e azionario, inseriti nel più ampio approccio di analisi top-down.

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