Fixed income poses challenges

Economics

This week we expect the US trade deficit to have risen in April on the back of a rebound in imports. Import price inflation is likely to have slowed in May.

We expect German industrial production growth in April to have declined in line with recent business surveys. In Japan machinery tool orders should have remained strong in May, in line with a pick up in exports. Consumer sentiment for May probably remained flat.

Foreign exchange

Euro/dollar: The euro is still heading for a triangle break-out. This target lies at 1.2000/1.1850.

Dollar/yen: Consolidation between 108.00 and 108.90.

Fixed Income

We stick to our short duration position for now, mainly because the current US yields are unsustainably low. Our position is also becoming rather uncomfortable, and we are currently reviewing our interest rate forecasts.

We advise opening long yen positions. The Japanese economy currently offers the highest chance of a positive surprise. A weaker euro should in the end prevent much lower yields from the current level.

Equities

If May was strong, the start of June wasn't bad either. Despite a rising oil price, stock markets at both sides of the ocean managed to continue their rally.

In the US interest rate sensitive sectors outperformed, while in Europe cyclical sectors took advantage of the weakened euro. At both sides of the ocean energy performed well. European telecom suffered from a series of profit warnings and downward revised forecasts.