Core views

Updated 10.05.2022

The war in Ukraine unfortunately continues, and as we write, EU President Ursula Von der Leyen has presented further draft sanctions on Russia including a proposal to cease all European oil imports from Russia by the end of the year. Inflation and how governments might manage cost of living crises as financial conditions tighten remain a hot topics particularly now that the Fed is agressively hiking rates (into a slowing growth cycle) while other global central banks are also embarking on the path to policy normalisation – tightening conditions globally. The prevailing inflation, policy tightening and geopolitical mix makes for a challenging market environment, and while volatility always permits tactical opportunity, the outlook has continued to be myred with challenges and uncertainty. In such a chaotic environment, while short-term opportunities may present themselves, it remains our view that quality (read: cash flow; pricing power) is key.

Equity convictions

Outlook as at 10.05.2022

What have our equity quant indicators been telling us?

In Europe, war in Ukraine continues to dominate, and as we write the European Union is negotiating with Hungary and other outliers  to bring together consensus on the banning of Russian oil (along with another sanctions package). In our equity regional matrix (the top-down quantitative indicator we have built to give us a regional view) Europe’s regional grade has now fallen further to -15% (from -8% a month ago and from 40% at the beginning of the year) due mostly to a very poor trend score (-98%) and ongoing weakness in sentiment (-18%). This puts the region in ‘bearish’ territory, yet as we recently presented in our Technical View, largely on account of euro weakness and the market’s lesser growth/tech exposure it has suffered less than its US peer in the recent global equity pullback – and we think we could even see some even be some tactical opporutnity across better-quality European value emerge. The market continues to be headline-driven, with inflation risk and global central-bank policy in sharp focus: euro-area headline inflation was stable at 7.5% in April but core climbed 0.6pp to 3.5%, driving the rising speculation of a first rate hike from the ECB in September or even July. Eurostat’s flash inflation estimate showed euro area GDP rising 0.2% QoQ in Q1 (folloing 0.3% in Q4) and clearly from higher energy prices could remain significant but the ongoing ‘re-opening’ dynamic should lift activity. Our economists maintain their forecasts for annual euro area GDP growth of 2.8% in 2022 and 2.0% in 2023 (with risks tilted to the downside). Medium-term energy plays we still like, and themes such as green / alternative energy remain relevant given the prevailing geopolitical tailwinds. See the latest iteration of our European long-only selection here.

The US remains in bearish territory in our equity regional matrix, poor April performance having hit trend hard (the trend score having fallen from -31% to -85%) and sentiment still muted (-2%). The unexpected negative Q1 growth figure -1.4% (QoQ SAAR) is being chalked up to a technical drag from net imports. Wage growth accelerated in Q1 but the core PCE inflation print showing a rise of 0.1% in March (same as February) appears to be losing momentum. The Fed’s announcement at the May meeting that it was hiking 50 basis points more (and that there could be more 50 basis point hikes to come) was initially met with relief (on comments from Powell that 75 basis points was off the table) but since then US equities have gone on to continue their weekly losing streak, tech suffering the most and the 10-year US Treasury yield breaking 3% on concerns over the Fed’s ability to get inflation under control and achieve a ‘soft landing’ as the growth outlook starts to look more (globally) challenging.  We now see the debate start to play out between those who think that the backdrop for risk assets has deteriorated definitively (in particular for growth stocks) and those who think that recent declines will soon reveal buying opportunity in some quality stocks that are being indiscriminately sold in the capitulation (tech in particular). Friday’s jobs report was strong (the US economy adding 428K jobs in April, beating forecasts and in line with March, but hourly wages grew less than anticipated) as we write markets are braced for Wednesday’s CPI print as investors continue to strain for visibility on the extent to which we are seeing peak inflation. The most recent iteration of our US long-only selection can be found here.

Japan remains in neutral territory, its regional score having managed to turn positive over the past month from -9% to 6%) despite its trend score falling to -98% from -55% and largely thanks to the sentiment score switching from -12% to a high 65%: the region has continued to attract attention on account of its easy policy, muted inflation and attractive valuations. Ongoing BoJ policy that favours yield curve control has continued to weigh on the yen - which should in turn continue to benefit exporters while Japanese equities as a whole now look relatively cheap (the region’s value score has climbed further from 81% to 93% over the past month). While clearly not immune from global dynamics the risk environment nonetheless continues to be perceived as healthier in the country than elsewhere.

Emerging markets' regional score has fallen from a ‘neutral’ -10% to a ‘bearish’ -12, the trend score weakening to -92 from -67%. Chinese equities continue to appear attractively valued but the growth outlook remains challenging given the impact of the ongoing Zero-covid policy implementation (Chinese official PMIs in April registered the lowest readings since February 2020). More easing and policy support notwithstanding and given the current geopolitical headwinds, we would continue approach with caution (and we keep an eye on ongoing regulation and also sanctions risk).

 

Source: FactSet; Pictet Trading Strategy; as of 6/5/2022.

All of our theoretical selection lists are available on request, and for an introduction to our theoretical approach and quantitative process see 'The PTS Quant Process'.

Macro convictions

Outlook as at 10.05.2022

Macro outlook

The US Treasury yield continued its rise in April thanks to hawkish rhetoric (and we saw the 10-2 US sovereign curve briefly invert). However recently the Treasury curve has been steepening again the 10-year rising above 3% triggered by the Fed meeting last week - and closing the week around 3.13% - the upward momentum has since our last update supported a rise towards the technical hurdle at 2.60% (a level at which the 76.4% Fib retracement and the falling long-term resistance line linking the highs since 1994 meet) and now on towards the next resistance currently holding at 3.26% (a level corresponding to the target of the bullish “cup & handle” and the prior high made in 2018). A confirmed rise above 3% could put the 10-year yield into a new bullish paradigm in our view

Source: Factset - Pictet Trading Strategy – as of 10.05.2022 *criteria are explained in the endnotes The target price presented in the chart is based upon chart analysis. This is not the product of any Pictet financial research unit

For further information see our latest technical views on equity indices and sectors, and currencies, commodities and bonds.  All of our publications and selection lists are available on request, and further information on the criteria we refer to can be found here.

Key views and targets

A sum-up of our core views and targets is presented in our core views table below (click to enlarge). All of our selection lists are also of course available on request.

Source: FactSet; Pictet Trading Strategy – as of 10.05.2021 *The target prices presented are based upon chart analysis. This is not the product of any Pictet financial research unit.

Find out more

For the most recent updates on our FX convictions, see our latest technical views on equity indices and sectors, and currencies, commodities and bonds, and a short introduction to our quantitative process is available here.

The Trading Strategy Team

10.05.2022

To view this page as a PDF click here.  For further information please browse: 

 

Home

 

Disclosure notice

Please click on this link to see important disclosure information. This document is reserved for the exclusive use of the recipient. This document is intended for distribution to professional clients, accredited investors, expert investors and institutional investors only and not for distribution to retail investors.