Weekly View - Truce in the middle east
As missiles were exchanged between Israel and Gaza, nuclear negotiations between Western leaders and Iran progressed last week. Oil prices came down on the possibility that eased sanctions would release 1.4mn barrels per day from Iran. Bond yields corrected from their peak. Next month’s Iranian elections are key, because if the moderates are not victorious, then all bets for any potential agreement are off. For now, Thursday’s ceasefire between Israel and Hamas delivered some welcome positive news in the region.
Talk of an eventual tapering of quantitative easing was included in the minutes of last week’s Federal Reserve meeting. Markets continue to debate whether any tapering will be soon and fast or late and slow. We think the latter is more likely and that it will be a topic of discussion at the Fed’s Jackson Hole seminar, with tapering starting in early 2022. We remain underweight government bonds. Meanwhile in Europe, purchasing manager indices came out better than expected, as vaccination campaigns accelerate and Europe’s economies start to reopen. We expect an even better summer, especially in the wake of the EU’s agreement on a vaccination passport, which should encourage vaccination uptake and increased mobility. This bodes well for our revenge of the losers 2021 investment theme.
The most recent bitcoin price correction brought attention to how potential increased interference by Chinese authorities and US regulators add another hurdle to the prospects of the cryptocurrency and its peers. We are of the firm view that regulation and security around cryptocurrencies have been necessary and will only grow more critical. Of note, this latest price correction has not derailed equity markets, given the strong Q1 reporting season and earnings revisions. In regard to future outlook for corporate earnings, the Biden administration lowered its global tax rate proposal to 15% from the initial 21%. This is more acceptable for low-tax regime countries. With share buy back intentions running at historically high levels among European companies, which tend to prefer paying dividends, the landscape appears to be changing. We are neutral euro-area equities and underweight US ones.