Despite the Covid-19 pandemic, both the US and European markets have recorded new highs, an indication that investor risk appetite remains strong. In the US, bullish sentiment was largely fueled by fiscal support from the Federal Reserve, which downplayed short- and medium-term inflation risks. In Europe, both the situation and the market levers are different, but lead to the same bullish sentiment: investors continue to welcome strong monetary support from the ECB. milanofinanza.it interviewed Fabio De Cillis (pictured), Head of Italy of IG, on the further potential of the equity markets, the inflationary risks and some hot topics such as the default of the Archegos hedge fund and the bitcoin rush.
© Milano Finanza
Question: The European market has grown a lot since the beginning of the year, do you think it still has room for extension and on what basis?
Answer: We believe that the European market still has room to rise further for multiple reasons. We believe, in fact, that the ultra-accommodative monetary policies of the ECB, the expansive fiscal policies of national governments, together with the central ones of the European Commission with the Next Generation EU, and the positive effect of the new US plans to support the economy ( reliefplan and infrastructure program), can continue to inject liquidity into the system, keeping share prices high. Furthermore, the probable acceleration of the vaccination campaign carried out by some European countries will make it possible to recover the performance gap between Europe and the United States. Already in the first quarter of this year we noticed this phenomenon, with Piazza Affari, Paris and Frankfurt showing performances above those of Wall Street.
Q: What are the sectors to focus on and why?
A: The sectors to focus on are cyclical ones such as industrials (automobiles, construction, materials, chemicals) which will be favored by the increase in expectations for an economic recovery that will begin to show its strength. The recent SME indices in the manufacturing sector also showed new historical records for some countries (Germany and the Netherlands) and highs of the last 20 years for Italy and France, driven by new orders and production. The energy sector in the coming months will also be favored by the return of strong demand for oil that will lead to the price of crude oil to rise again. We expect both US crude, Wti Light crude, and European crude Brent, to return above $ 70 a barrel by the summer.
Q: Can the rise in Treasury yields continue and therefore favor a switch from equity to fixed income?
A: So far, the rise in Treasury yields has shown investors’ preference for an intra-asset rather than an inter-asset shift. Therefore, we have seen within the equity component a switch towards value stocks at the expense of growth ones. As evidence of this, there are the new all-time highs of Dow Jones IA and S & P500, while the Nasdaq 100 has come to lose more than 10% from its February highs. The purchase of Treasuries was all in all contained, given that the yields, although doubled in the space of a few months, remain at historically low levels, therefore with an important dose of risk in light of the current inflation expectations incorporated on the various forwards and on breakeveninflation rate. We expect the switch to Treasuries to strengthen in conjunction with a rise in yields above the 2.30-2.50% area, which could take several months to come.
Q: Will the rise in Treasury yields affect European government bond yields in the same way, or are fears of a surge in inflation in Europe less pronounced and why?
A: At the moment this contagion effect has not made itself felt, also because the inflation expectations of the Eurozone show some signs of timid acceleration that do not cause concern either among investors or the European Central Bank, which still remains extremely accommodating. The different resources used for the pandemic crisis in the US and Europe and the different speed of propagation of these (in both cases biased in favor of the former) mean that fears of overheating of the economy are stronger overseas. Some effects could come indirectly, due to an excessive depreciation of the euro, particularly against the dollar, even if the recent movement is not yet sufficient to trigger such a fear.
Q: The default of the Archegos fund has once again exposed the criticalities of instruments with too much financial leverage, not far from the Game Stop scandal. Are you expecting yet another squeeze from the control authorities? How is IG regulating at this juncture?
A: It is difficult to say if there will be consequences, personally I think not and the markets already seem to be looking elsewhere. Financial leverage is still an excellent tool if used correctly and not too aggressively, for example it is very useful for diversifying the portfolio more effectively. We want our traders to use it consciously, whether they are full-time or occasional traders, for this reason we are very committed to training. We also constantly monitor the liquidity and volatility of individual financial instruments, this allows us, when needed, to modify the leverage factor so that it is always consistent with our parameters and above all to prevent the final investor from making a excessive use when market conditions do not allow it.
Q: How is trading in Italy evolving? What new tools do IG customers have at their disposal?
A: The dissemination of information is faster and faster and the levels of financial education are gradually increasing: these two aspects together lead many people to approach the markets. Over the past year, the combination of pandemic, lockdown and spike in stock market volatility has boosted the desire to trade like never before. Among the instruments that have been most successful are the Turbo24 certificates, highly appreciated because they allow you to benefit from the leverage effect, but at the same time they are products with limited risk, i.e. the investor immediately knows what the maximum potential loss is. They are listed H24 and allow you to operate even in closed markets. To understand how important this is for traders, just think that according to the latest data, 37% of trades were made outside trading hours.
Q: Have IG’s customers who invest in cryptocurrencies increased? How much do they invest on average? How much does bitcoin weigh compared to other cryptocurrencies?
A: Yes, they have increased a lot. After all, the request to invest in cryptocurrencies is directly proportional to the price trend, with the race to the top we are witnessing we have seen a strong increase in demand. The average investment is around 7500 euros, even if it varies a lot from trader to trader, and I can confirm that bitcoin is by far the most traded crypto: in the last 6 months it has in fact represented 77% of volumes. (All rights reserved)
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