Weekly Analysis
Typography

The purchasing power of European and US households will not be left unaffected by the surge in the price of oil observed since mid-2017.......

However, as the movement is taking place against a background of optimism on the future, it is less likely to negatively impact real consumption. Furthermore, it is also fuelling a lively recovery in exports to producer countries. Monetary policy normalisation continues, and expectations for rate hikes are mounting.

- Since mid-December, several movements have been observed that may be tied to the spreading of more optimistic views on the global growth scenario: an increase in yields on the rate curves, further gains for the global stock indices, and, lastly, rising oil prices as well. Brent Crude oil hit the USD 70 mark, well above the levels forecast a year ago. This trend probably also reflects shocks on the supply side, and the trend of the currency markets (the dollar has weakened, despite the approval of the tax reform and the upward revision of expectations referred to fed funds rates). In percentage terms, the rise in oil prices since mid-2017 has been significant (+42%). However, also due to the simultaneous appreciation of the euro against the dollar, the movement of energy sector price indices has been much more modest. As a result, 2017 brought a drain of disposable income no higher than 0.2% in Germany, and only a little larger in Italy. Within these limits, and in an environment of optimistic views on the future, the rise in energy prices could possibly be offset by changes in the propensity to save, with no negative repercussions on the real consumption trend. 

However, the net impact on growth could turn out to be even less worrying should the positive fallout on foreign demand originating in producer countries be confirmed.  In 2017Q3, the overall imports of producer countries had already risen back to the same levels as at the beginning of 2016, recovering around 17 billion dollars compared to the same period in the previous year. Of these, around two billion were claimed by Germany, and just under one by Italy. China also enjoyed an increase in exports to oil producer countries, by around $2bn. This trend should continue in 2018, despite some disruption tied to the appreciation of the euro.

- The gradual normalisation of monetary policy is proceeding. This week, in the wake of robust economic fundamentals, the Bank of Canada stepped up its policy rate to 1.25%. In the United States, Kaplan (Dallas Fed) mused that four rate hikes may be required in 2018, although his message was balanced in part by the persistently cautious stance of Evans (Chicago Fed). The Beige Book prepared for the FOMC meeting at the end of the month certifies ongoing growth in activity at rates defined as between “modest and moderate” in 11 districts, and “robust” in the Dallas area, albeit without providing crucial indications. At present, the fed funds market is pricing in between two and three hikes in 2018, and upside expectations have increased further the past few days (the December contract has shed a further 6bps). We will discuss US monetary policy in greater detail next week, in our usual preview ahead of the Fed meeting.

In the ECB camp, the lo EUR/USD exchange rate’s upward thrust has generated some unease within the Governing Council, prompting several members to warn that developments should be monitored closely. As noted by Anna Grimaldi in her analysis in this edition of our Weekly Economic Monitor , recent events could induce the ECB to keep a low profile in the months ahead, and to refrain from speeding up the change in its monetary policy stance too much. Although abandonment of the zero-rate policy in 2019 seems increasingly likely, in light of the stronger than expected trend of the European economy.


Appendix
Analyst Certification

The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.

Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d'Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).

Valuation Methodology

Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.

Coverage Policy And Frequency Of Research Reports

Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.

Source: BONDWorld