Good morning! As we step into the final month of this eventful year, the trends from November persist. Rates are continuing their decline, though at a slower pace, and credit spreads remain stable. Volatility is gradually increasing in the FX market. Equities are steadily rising, with investor interest spreading to mid-caps and international stocks, and European markets are reaching multiyear highs. Oil is facing pressure from powerful CTAs (which now constitute over 70% of daily volume in the paper market), and the recent OPEC+ decision to cut supply further had a limited impact. Fundamentally, the market is slightly in surplus, supported by China's completion of inventory restocking and increasing production in the US shale system. This dynamic supports the narrative of lower inflation and potential central bank rate cuts, easing pressure on consumer budgets.
A significant development this week is the strengthening of the JPY after the Bank of Japan laid out scenarios for a pivot away from negative interest rate policies. The December meeting is now considered live, catching the market off guard, as expectations were for a policy move after Q1 2024. The FX market has adjusted rapidly to the interest rate differential, reaching 145, slightly overshooting, there are huge leverage shorts (carry trades) that have to unwind. I wouldn't be surprised to see carry trades in US rates closing after this violent move with negative implications for high EM high yielders.
In equity news, there have been notable buyouts in small-cap biotech in the US and small-cap tech services in Europe, highlighting the recent rotation from large-cap growth to small-cap growth. Energy names are facing challenges, but the market views the recent oil collapse more as a result of seasonal factors than structural issues. Merck, the German life science giant, reported disappointing results on a Phase 3 drug, and Volkswagen announced a significant cost-cutting plan to address its high cost base. Spanish banks are proactively lowering spreads for mortgage rates, indicating a healthy and growing market, albeit with negative short-term implications for net interest income. Unfortunately, signs of froth persist in the US meme equity universe, but the market's cleansing mechanism is expected to prevail in the long term.
Alexandros Tavlaridis