US elections boost equities

Economics

Economic data for this week in the Eurozone will centre around Q3 GDP growth, which is expected to have slowed slightly compared to Q2 in quarter-on-quarter terms.

In the US, underlying retail sales growth is likely to have slowed in October, but to remain in positive territory. We now expect the Federal Reserve to raise interest rates by 25bp this Wednesday. In Japan we expect Q3 GDP growth to remain stable, in line with domestic demand.

Foreign exchange

Euro/dollar: The outlook remains higher with 1.2925 and 1.3045 as next upside objectives.

Dollar/yen: Remains bearish towards 105.00.

Fixed Income

Long yields in the U.S. were quite stable during most of the week, while European yields fell somewhat, especially after the announcement of the election outcome in the U.S.

Fears of the negative effects of a weak dollar linked to expected external deficit worsening played a role. The employment report last Friday was very strong and largely above expectations including the upward revision in last month's figures.

Bond yields rose after the data release on Friday, but nevertheless yields curves have flattened compared to last week as short rates were up. Bond yields are expected to be on the rise in the U.S. and, to a lesser extent, also in Europe.

Equities

The election outcome gave a boost to equity markets last week as the proclaimed winner George Bush was also Wall Street's favourite candidate.

As there is a strong discrepancy between the technical image and the economic fundamentals, it came as no surprise that markets responded positively to the elections result.

Nevertheless, we think that investors will refocus on the economic fundamentals in due course. For now, we stick to our cautious view and still prefer defensive sectors like Energy and Telecom Services.