With the ECB expected first to change its communication emphasis over the summer followed by a move to ‘taper’ its quantitative easing programme moving into 2018, investors should expect the ‘one-way’ trend in Eurozone rates to transition to increasingly ‘two-way’ volatility, much as seen in the post-2013 period following the end of the US quantitative easing programme in 2013.
With global equities rising 7% in 1Q2017, valuations appear somewhat high on a historical basis. However, the bulk of this overvaluation is due to elevated multiples in the US, where at 22x trailing earnings, valuations have only been at such a level during the tech bubble of 2000-01.
The resilience in market earnings forecasts is in sharp contrast to the pattern seen in recent years. In each of the past five years (2012–2016) consensus estimates have declined materially in the first quarter. In each case, estimates continued to be reduced through the rest of the year.
The first round of the French presidential elections delivered an outcome close to both pre-election polls and market expectations, reversing the trends seen during the BREXIT referendum and the US presidential election in 2016.