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Société Générale were out with a massive note overnight looking ahead to Q2 of 2018

Its titled: Momentum now broken, ECB the key worry in 2Q

which neatly encapsulates its major themes.

SG's

7 key calls from the note are, in brief:

  1. ECB guidance change around the corner
  2. US dollar - keeping a medium-term bearish view
  3. Japan assets: a sweet spot with diversification benefits
  4. Positive equity/bond correlation - a need for protection
  5. First cracks have started to appear - beware of leverage
  6. UK assets: between a rock and a hard place
  7. Low-probability events that could gain momentum this year

A little more detail on (these are in brief) ...

1. ECB guidance change around the corner

  • We believe that a reallocation into euroassets is necessary ahead of stronger guidance from the European central bank

2. USD

  • stick to our multi-year bearish view on the US dollar
  • could be supported in the coming weeks by further repricing of the Fed tightening path and rising inflation expectations. However, with inflation peaking soon, the rising US twin deficits, growing political uncertainty ahead of the November mid-term elections and the prospects of a trade war/rising protectionism are all likely to weigh on the US currency. Valuation-wise, the USD has further room for downside

7. The wild cards, one of which is:

  • The end of the deadlock on Brexit, one way or another: Long GBP volatility up to the 29 March 2019 Brexit deadline

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SG's main investment implications (this on equities and currencies, in brief):

  • With flat returns seen for the US S&P500 this year, we advise redistributing into markets with a much higher equity risk premium and structural reforms, i.e. the euro area and Japan
  • We advocate a further reduction of USD exposure. We increase portfolio protection through higher JPY exposure. We maintain high exposure to EM (12%) and to commodity currencies (RUB and NOK)
  • Long EUR/USD, short USD/JPY