Asset allocation – May 2018

04 May 2018

  • Higher US Treasury yields rocked US dollar and emerging markets
  • The rise came after US inflation and crude oil prices hit 2018 highs, robust US data and market worries about US debt issuance
  • We think further interest-rate increases will not keep equities from rallying as long as growth remains solid
  • We doubt USD strength can persist unless the US economy continues to grow faster than the rest of the world


  • As in February, US Treasury yields rose to the point where they ended up rocking markets, but this time the disruption was more visible in the US dollar and emerging markets than in equity markets.
  • We see several factors for the rise: (i) US inflation and crude oil prices hit 2018 highs in April, (ii) US macroeconomic data have been robust enough for the US Federal Reserve to continue normalising its interest-rate policy, and (iii) rates markets have become more concerned about US Treasury debt issuance.
  • The bar is quite high for further interest-rate increases in the near term, but when policy tightening does resume, we think this will not keep equity markets from rallying as long as the growth backdrop remains solid.
  • The stronger USD reflects disappointing economic activity data in the G10 and emerging markets compared to the US. This is consistent with markets pricing in reduced expectations of central bank policy normalisation in Europe and Japan.
  • Further USD strength is possible, but we doubt it can persist in the medium term unless the prospects for growth in the US continue to decouple from those for the rest of the world.


  • Our key asset allocation views have not changed. We remain long European equities, where we see more attractive valuations and good earnings fundamentals, while we remain underweight government bonds, mainly by being short German Bunds.
  • In April, we took a long position in US bank equities versus the overall US index. This relative value trade should do well as banks typically benefit as interest income rises and as the economic recovery matures.


Global equities had a good start to the month before facing new investor concerns about rising bond yields and US inflation, in line with what happened at the end of January. The nerves were more pronounced in the US where the 10-year yield broke above 3% for the first time in four years. The S&P 500 equity index still ended the month in modestly positive territory, in part due to supportive earnings reports. European and Japanese equity markets did better, catching up after lagging since the beginning of the year. The UK was among the top performers, returning more than 6%, on the back of a weaker currency. It was outranked only by the Athens stock exchange, which rose by about 10% on constructive fiscal news. Emerging markets lagged the pack mainly due to the stronger US dollar. The market tensions were perhaps more evident in currency than in equity markets. The US dollar started strengthening after a prolonged period of weakness that began in January 2017. The US dollar index (DXY) rose by 2%, its best monthly performance since November 2016. In the UK, sterling peaked at 1.43 versus the US dollar before dropping by 4% in the second half of April due to disappointing macroeconomic figures (weak retail sales, lower-than-expected GDP growth and falling CPI inflation). Fixed-income markets were generally down over the month as global yields rose. The sell-off in US government bonds pushed yields above 3%. German Bunds sold off as well, but to a lesser extent as ECB President Draghi maintained a dovish tone and showed no inclination to begin normalising monetary policy. In credit markets, investment-grade followed suit, retreating by 1% in the US. But it was flat in Europe. However, high-yield markets outperformed partly thanks to a sharp rally in energy stocks. Despite calls by Germany’s Merkel and France’s Emmanuel Macron to hold off on further sanctions on Iran, the Trump administration appeared increasingly hawkish towards this OPEC oil producer. West Texas Industrial crude oil rose by about 8% over the month, also pushed higher by statements by Saudi Arabia in support of USD 80 per barrel oil ahead of next year’s Saudi Aramco IPO. Geopolitics also affected industrial metals prices: Russian aluminium producer Rusal was hit hard by US sanctions and sent aluminium prices up by almost 30% before cooling down to end the month up 12%.

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