Good morning. The market appears to have reacted positively to Powell's recent balanced comments, the expected decision to hold rates, and the FED's recognition that tighter financial conditions are affecting economic activity. It seems that my view that rates would remain at these levels until something changed in the real economy is currently being validated. The weak US ISM numbers have added to the rebound in rates, with particular strength in the bond market's middle maturities, where I believe relative value can be found in the future.
The Treasury's q4 borrowing plan, totaling a staggering $760 billion and kept the portion of short term to longer term relative unchanged (below market expectations). This validates the view that the market has difficulty absorbing the huge amount (tails in all big new issues). My main concern at the moment is the significant liquidity drainage, which is more pronounced in the USD block than in EUR, JPY, and smaller currencies.
Today's impressive rally in indices seems to be driven by macro short-covering, with long money largely on the sidelines and facing systematic redemptions. No wonder that big CTAs are not performing, when most of them follow similar strategies in size and direction simultaneously. We might witness a small rotation from low beta to high beta as a catch-up trade.
In corporate news, the major earnings season is wrapping up, and it appears that companies are approaching their 2024 guidance more cautiously than they did half a year ago. While results are generally satisfactory, guidance is more muted. It's possible that the initial expectation of 12% EPS growth for the S&P 500 in 2024 may need to be revised downward to a more realistic 5-7% given the current outlook. Notably, Shell delivered a strong set of results with a larger-than-expected buyback plan. ING reported a beat of lower quality, expressed some concerns about NIM, but promised attractive capital returns to shareholders (15%). Orsted confirmed a profit warning for its US projects and wrote down $4 billion. The CleanTech sector remains challenging. AMD delivered decent results with a balanced view, standing out amidst a sea of disappointments in the semiconductor sector. Many US SaaS companies are experiencing a return to more reasonable valuations as sales growth moderates (Paycom, Okta, etc.). Still, it appears frothy to me. One of the sectors that have seen the most relative selloff over the past month is medical devices, where I'm currently searching for relative value in my 2024 positioning.
Alexandros Tavlaridis