UBS: Will rebound continue?

UBS House View: 

Key Federal Reserve officials indicated that a rate hike was on the cards this year. New York FedPresident Bill Dudley commented on monetary policy for the first time since September’s disappointing employment data, advocating higher rates this year. Atlanta’s Fed President Dennis Lockhart also indicated that he expects a rate hike “later this year at the October or December FOMC meetings as likely appropriate,” but noted the need to closely monitor upcoming data for consumer activity.CIO continues to expect a liftoff in December.

OPEC believes rival US oil producers will reduce production further. Slower output growth outside the cartel would help support higher oil prices. CIO expects Brent to reach USD 72/bbl over the coming 6–12 months. OPEC forecasts US production will drop to 13.4mbpd in 4Q 2015, down from 13.8mbpd in 2Qand 13.5mbpd in 3Q. The cartel revised lower its forecast for both 2015 and 2016 non-OPEC supply by 200,000bpd and 500,000bpd respectively from last month’s report. 

China’s central bank expanded its bank lending program. This should help lower funding costs and support the real economy; CIO still expects further easing measures to support China’s growth. After last year’s introduction of the bank lending program in Shandong and Guangdong provinces, the latest program means lenders in more Chinese cities and provinces, including Beijing and Shanghai, will be able to borrow from the central bank using loan assets as collateral.

The VIX index, which measures the expected implied volatility of US stocks from options values, managed its 10th consecutive daily fall. That is only the third time in the past decade we have seen a downhillrun lasting this long. In the six months after the last such spree – in October 2009 – the S&P 500 climbed almost 10%. The prior occasion, in May 2005, was followed by a 6% rise in the US equity index. CIO is neutral US equities, believing that Eurozone and Japanese markets will offer superior risk-adjusted rates of return. But the fall in the VIX is nonetheless an encouraging sign that global sentiment may be recovering.

India’s inflation accelerated in September while industrial output beat forecasts. Despite the rise, inflation was well below the RBI’s 6% target by January 2016, suggesting the central bank still has room for more easing measures. CIO is overweight on Indian stocks. India’s CPI rose 4.4% y/y in September, versus August’s revised 3.7% rise, while industrial production grew 6.4% y/y in August, above expectations for a 4.8% rise.

Deflation resurfaced in the UK, with prices falling 0.1% in September. In combination with a soft 1% rise in ex-food and energy consumer price index, the data confirms that there is little pressure on the Bank of England to raise rates in a rush. Headline inflation was last negative in April.

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