This website uses cookies in order to improve user experience. If you close this box or continue browsing, we will assume that you are happy with this. For more information about the cookies we use or to find out how you can disable cookies, see our Cookies Notice.

We remain constructive

Our December 2018 targets, slightly revised

Despite recent market turbulence we reiterate our key themes, albeit with minor adjustments

Economic outlook:

We see solid economic momentum in both Europe and the United States, but few signs as yet of inflation sharply accelerating. For now, no significant impact on real economic activity from financial-market events.

Monetary policy:

We expect three rate hikes by the U.S. Federal Reserve by the end of 2018. Towards the end of the year, attention is likely to shift to the European Central Bank (ECB) following the Fed's path towards normalization.

Currencies:

We believe that the recent dollar weakness has been overdone. Yield differentials, high net long euro positions and technical factors should leave some scope for a dollar rebound. For December 2018, we are sticking to our call of $1.15 per euro.

Fixed income:

  • We are raising our rates forecasts for U.S. Treasuries (2-, 10- and 30-year) and German Bunds (2- and 10-year).

  • For the Eurozone periphery, we expect a tightening of spreads (vs. Bunds) for Italy to 120 bps, and are reducing our spread forecast for Spain to 90 bps (roughly where markets are currently trading).

  • No changes to other spread targets.

Equities:

  • We are sticking to our view that there is significant upside from current levels.

  • All our year-end targets for developed markets remain intact. Within developed markets this suggests larger upside outside the United States.

  • Within emerging markets, we are actually raising our targets for Latin America.

Fixed income

  Current* Dec 2018F

United States

U.S. Treasuries (10-year)

2.85%

3.00%

U.S. municipal bonds

86.1%

85%

U.S. investment-grade corporates

88 bp

80 bp

U.S. high-yield corporates

369 bp

350 bp

Securitized: mortgage-backed securities1

72 bp

100 bp

Europe

German Bunds (10-year)

0.75%

1.00%

UK Gilts (10-year)

1.57%

1.40%

Euro investment-grade corporates2

84 bp

75 bp

Euro high-yield corporates2

291 bp

260 bp

Securitized: covered bonds

36 bp

65 bp

Italy (10-year)2

130 bp

120 bp

Asia-Pacific

Japanese government bonds (10-year)

0.07%

0.1%

Asia credit

219 bp

210 bp

Global

Emerging-market sovereigns

287 bp

285 bp

Emerging-market credit

282 bp

270 bp

* Source: Bloomberg Finance L.P. as of 2/9/18

F refers to our forecasts as of 2/12/18

1 Current-coupon spread vs. 7-year U.S. Treasuries

2 Spread over German Bunds

bp = basis points

For sovereign bonds, denotes rising yields, unchanged yields and falling yields. For corporates, securitized/specialties and emerging-market bonds, the arrows depict the option-adjusted spread over U.S. Treasuries: depicts a rising spread, a sideways trend and a falling spread.

The arrows’ colors illustrate the return opportunities for long-only investors. Positive return potential for long-only investors. Limited return opportunity as well as downside risk. Negative return potential for long-only investors.

Currencies

  Currencies Current* Dec 2018F

EUR vs. USD

1.23

1.15

USD vs. JPY

109

115

EUR vs. GBP

0.89

0.88

GBP vs. USD

1.38

1.3

USD vs. CNY

6.3

6.8

* Source: Bloomberg Finance L.P. as of 2/9/18

F refers to our forecasts as of 2/12/18

Equities

  Equity markets (index value in points) Current* Dec 2018F

United States (S&P 500)

2,620

2,750

Europe (Stoxx Europe 600)

369

405

Eurozone (Euro Stoxx 50)

3,326

3,780

Germany (Dax)1

12,107

14,100

United Kingdom (FTSE 100)

7,092

7,500

Switzerland (Swiss Market Index)

8,682

9,450

Japan (MSCI Japan Index)

1,030

1,120

MSCI Emerging Markets Index (USD)

1,143

1,210

MSCI AC Asia ex Japan Index (USD)

697

760

MSCI EM Latin America Index (USD)

2,952

3,150

* Sources: Bloomberg Finance L.P. as of 2/9/18

F refers to our forecasts as of 2/12/18

1 Total-return index (includes dividends)

For currencies and equities, the arrows signal whether we expect to see an upward trend , a sideways trend or a downward trend .

The arrows’ colors illustrate the return opportunities for long-only investors. Positive return potential for long-only investors. Limited return opportunity as well as downside risk. Negative return potential for long-only investors

Related Articles

Feb 23, 2018 New Chart of the week

Chart of the week

Valuation multiples for the S&P 500 are stretched

Feb 16, 2018 Chart of the week

Chart of the week

Scared about rising inflation? If so, keep calm for now!

Feb 09, 2018 Equity

German equities – what else?

German equities have become even more appealing after the correction.

Feb 09, 2018 Chart of the week

Chart of the week

Back to the "old normal"

Feb 07, 2018 Macro Outlook

"Low and slow" – for now

Why low unemployment still matters for wages and prices

Feb 06, 2018 CIO Flash

Back to normality

A market correction was arguably overdue. We remain optimistic.

Feb 06, 2018 Investment Traffic Lights

Investment traffic lights

Our tactical and strategic view

Jan 26, 2018 Chart of the week

Chart of the week

Why the recent rally on Wall Street might well continue

Jan 19, 2018 Chart of the week

Chart of the week

Are German shares still attractive? A look at the Dax price index.

Jan 05, 2018 Investment Traffic Lights

Investment traffic lights

Our tactical and strategic view

Dec 22, 2017 Macro Outlook

Bitcoins all over the place

A brilliant idea, whose future will depend on how regulation pans out.

Dec 08, 2017 Investment Traffic Lights

Investment traffic lights

Our tactical and strategic view

Dec 08, 2017 Chart of the week

Chart of the week

Why you probably shouldn't worry about the flattening U.S. yield curve.

Dec 07, 2017 Letter to Investors

Beware of euphoria

We enter 2018 with optimism. High market expectations make us cautious, though.

Dec 07, 2017 Forecasts

Our forecasts

All forecasts at a glance

Dec 07, 2017 Macro Outlook

What could go wrong?

As the recovery enters its ninth year, inflation needs to be watched closely.

Dec 07, 2017 Multi Asset

Equities, what else?

We have positioned ourselves for late cycle.

Dec 07, 2017 Fixed Income

Don't write off bonds

Corporate and emerging-market bonds should provide solid returns in 2018.

Feedback

Please let us know what you think about this article/page.