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Market Stories by Fathom, 23/05/2024

Good morning. It's been a while since our last update, and time flies when you're working hard.

What's changed in the macroeconomic landscape over the past month? The most significant development has been the strong upward movement in the commodity space, led by copper. Investment banks are pushing the theme of a supply deficit for the next decade, and the aggressive bid by BHP for Anglo American's copper assets has renewed investor interest in the sector. My concerns with this short-term move are twofold:


  1. China is holding substantial reserves, well above normal levels, so the world's largest consumer is not currently buying.

  2. Higher prices might not necessarily bring new capacity to the market.


The energy transition is proving to be more disruptive and expensive than initially thought, effectively imposing a significant tax burden on consumers.


The second important development is the improving outlook for EU growth, which will be further supported by the expected rate cuts in Q3. Conversely, the US has seen some softer economic data (retail sales, housing starts), and yesterday's FED minutes indicated that policy will remain unchanged for now. The question is whether we'll see a soft patch in the summer or if the super accommodating fiscal policy will smooth this out again.


In this backdrop, long-term rates are maintaining their ranges (10-year Treasury yields at 4.3-4.7% in the US and 2.3-2.6% in Europe), but Japan, with its unconventional policy, has seen 10-year yields rise above 1% for the first time in a decade. This still seems too low to support the ongoing depreciation of the yen.


We are witnessing a record year-to-date issuance in the fixed-income space, driven by the enormous amounts of US government paper and followed by investment-grade corporations (320 billion), as treasurers take advantage of the tight spreads.


In equity markets, the Q1 reporting period is mostly over, and the results are positive. We saw robust earnings growth, and the 8% EPS forecast for 2024 looks attainable at this point. The stellar contribution from Nvidia will likely become more broad-based in the coming quarters. In Europe, earnings beats are at 60%, with a median growth rate of 5%. The best performances have come from the financial sector, materials, and energy, while consumer discretionary and technology have lagged. Most strategists have abandoned their bearish calls (Morgan Stanley's predictions were notably off in both their investment process and balance sheet positioning), so the market may now consolidate until financial conditions eventually tighten.


Overall, while there are reasons for optimism, there are also several risks to watch. As always, staying informed and flexible in our strategies will be crucial.

 

Alexandros Tavlaridis

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Market Stories by Fathom, 20/06/2024

Good morning. Lots of developments over the past fortnight. The FED's dot plot projections now indicate that rate cuts have been pushed from 2024 to 2025, albeit with higher forecasted dispersion. Rec

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