After a less than thrilling summer, since September, equity markets have been relatively immune to news flow on the geopolitical front, despite North Korea’s nuclear threats and the crisis regarding Catalonia, which remains broadly unresolved.
We see two main reasons for the uptick in equity market performance: 1) the pro-European axis led by France and Germany is still strong and appears to be a potential backstop for further deterioration with regard to the situation in Spain, which is not, in our view, a systemic risk for the Eurozone; and 2) in the last quarter of this year, we expect to see a renewed focus on market fundamentals. The benign growth scenario and the positive momentum for corporate earnings should continue to be supportive for equity markets, though we acknowledge that we are moving towards a more mature phase of the cycle. On fixed income, this “back to fundamentals” framework is driving a rebound in interest rates from year-to-date lows. In this context, we continue to maintain a cautious view on duration and a constructive approach on risk assets, especially equities.