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SycoMinute(s): February market update

Our Experts

While inflationary risk in the land of Uncle Sam has been investors’ main focus in February, US interest rates have followed their upward path. On the Old Continent, the trend has been less visible (10-year French and German rates first rose and then declined). Over the month, European equity markets have corrected sharply and saw a surge in volatility. While growth outlook in the Eurozone has pursued its upturn and 2017 corporate earnings have proven to be sound, major performance disparities between companies have been observed. Review of the economic newsflow by our portfolio manager Arnaud d’Aligny.

After the publication of data pointing to an uptick in wages, which are up +2.9% year over year (beating expectations and marking the strongest rise since June 2009), concerns that inflation would accelerate faster than planned in the United States – and therefore that monetary tightening would be sharper than expected (some investors are now forecasting four interest rate hikes from the Fed this year) – sparked a rise in U.S. yields (10-year rates in the U.S. reached 2.96% in February, their highest level since January 2014) and a sharp and broad-based correction across global equity markets.

Rates in France and Germany started to rise early on in the month (with the yield on 10-year OATs exceeding 1%), before declining again amid persisting political uncertainty in Europe: Italian elections with uncertain outcomes, five months of talks to form a coalition in Germany etc. European equity markets also corrected sharply. Having wiped all the gains recorded after the solid start to the year, this market downturn was also amplified by a surge in volatility (the VIX Index closed above 50 early in the month), urging quantitative investors to unwind a large number of “short volatility” positions.

This market downturn was also amplified by a surge in volatility (the VIX Index closed above 50 early in the month), urging quantitative investors to unwind a large number of “short volatility” positions.

Nevertheless, while some macroeconomic indicators are slightly down this month, most remain at record highs and the growth outlook in the Eurozone has been revised upwards. Fourth quarter corporate earnings have also been robust – with double-digit EPS growth in all major markets – and generally above expectations: 60% of Euro Stoxx companies released consensus-beating earnings.

However, depending on the earnings and guidance published by different companies, the market saw high return dispersion - with frequent 20% swings (up and down) recorded during the month.

The opinions and estimates given represent our judgement and may change without prior notice; the same is true of statements regarding financial market trends, which are based on current market conditions. We believe that the information provided on these pages is reliable; however, it should not be considered exhaustive. The data, images and citations contained have been calculated or produced using publicly-available information that we believe to be reliable but we have not independently verified. Please note that all forecasts have their own limitations; consequently, Sycomore Asset Management assumes no liability as to their materialisation. This publication is not intended to be an offer or solicitation to buy or sell any financial instrument whatsoever. References to specific securities or to their issuers are for illustrative purposes only and should not be interpreted as recommendations to buy or sell.

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