Q2 earnings were worse than expected but investors are pricing a ‘new world’
Earnings were bad in Q2 and worse than expected six weeks ago although the provided outlooks have improved and bolstered forward earnings expectations. It is clear from dividend futures that the market expect companies to rebound in terms of earnings but lower the payout ratio to either repay debt or invest in growth. Either way, our view is that investors have overlooked bad macro and earnings as they are pricing in a 'new world' of lower yields for longer but still high growth in certain areas of the economy which will drive bond proxy pricing in equities and accelerate equity concentration.
A mixed German August ZEW Survey
Due to the holiday break, there are few important economic data releases this week with the exception of some EM central bank meetings and a bunch of European statistics. Fortunately, this morning, the German August ZEW Survey is here to provide something a bit meatier. But the news is both good and bad…
How do changes in US real yields impact asset classes?
Falling US real yields have historically been coincident with rising gold, ringing EURUSD and falling USDJPY. These relationships are not that confusing but over time equities do have a positive relationship with real yields and as such equities should not behave as it does right now under rapidly falling real yields as they reflect falling expectations for growth. When we analyse the entire spectrum over change in US real yields we observe that equities rise rapidly under both significantly falling and rising real yields.