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The inflation numbers from the US last week added fuel to the risk-on sentiment

The inflation numbers from the US last week added fuel to the risk-on sentiment, as it indicates that the Federal Reserve is getting closer to the end of its aggressive tightening cycle, with rates likely to stabilize in the 5-5.5% range. The market is already pricing in rate cuts for 2024, and if core inflation continues to decrease, the Fed may indeed have to cut rates. Real rates above 1.5% for the USD are rare in economic history (2004-2009)and then we had a big economic rash. The recent move in FX markets was notable, with the USD weakening by 2.5%. Carry trades against low-yielding currencies like JPY, CHF, and to a lesser extent CNY, suffered losses, and the Euro strengthened without much positive macro news coming out of Europe.

We currently have 2 big arguments against the USD: a) ECB/BoE/SNB etc are still relatively hawkish with 2 more 25bp till September as core inflation is high (not a big fan of this argument as they have been behind the curve for 2 years and EU credit conditions are deteriorating rapidly) b) the twin deficits in the US that have revived the smiley theory (USD does well when growth is very strong or in recession, this point has historical merit). A weaker USD increases the odds of the US experiencing a soft landing, it is positive for EMs and slightly negative for Europe equities ( healthcare negative, industrials/auto negative, tech positive, defensive utilities/telecoms indifferent as they are dented by high debt).

As the reporting season has started, we have seen mixed results from various companies. JPM had very good results, WFC was decent, while C and STT reported bad results. Delta delivered an excellent guide, and Richemont was cautious about US luxury spending but had a positive outlook in Asia. European banks like Nordea and SEB delivered good-quality beats, which may lead to consensus upgrades for the EU bank earnings. Unicredit demonstrated effective management with cost-cutting measures to counterbalance inflation cost overruns. Thyssen-Nucera's IPO performed well, gaining 15%. The picture in US telecoms giants is alarming (not much leeway to move around when you carry 120b net debt and litigation risks might hit you). The same stands with the Chinese property sector, the office/residential demand is simply not there.

The market in the US is in full speculative mode (unprofitable tech 50+% ytd), with individual investor sentiment being bullish and institutional sentiment being more muted. As we head into summer vacations, investors should keep an eye on company earnings reports and navigate the market cautiously amid diminishing summer liquidity.

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