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Weekly Stories by Fathom

The ECB delivered what many commentators described as a dovish hike, meaning that after 10 consecutive rate increases and with the depo rate at 4%, they feel that if the rates stay at these levels for some quarters, they will negatively impact growth and the inflation outlook. Dovish, as the market prices after Lagarde's speech, that the tightening cycle has ended. The market correctly focused more on the ECB growth downgrades (2023 to +0.7% from 0.9% and for 2024 to 1% from 1.5%) and secondly on the inflation outlook (the Euro Commission kept the inflation forecast of 2023 at 6.5% and revisited upward the 2024 to 3.2% from 3.1%). As 5y5y inflation expectations are steady above the 2.5% pain threshold, the market still doesn't see inflation falling below the ECB target soon (supply-side shocks persistence). I am expecting a range of 3-4% for ECB rate policy for 2024. The EU has entered a typical stagflation environment that partially stems from the continent's structural issues, and monetary policy can do little about it. Germany also downgraded the 2023 growth to a -0.3% contraction from a small increase expected before, and France yesterday cut its 2024 GDP growth forecast by 0.2% to 1.4%. All the above, coupled with good US data (strong retail sales, higher than expected PPI), helped push the EURO below the 1.07 level decisively and with no signs of a short-term reversion.


Asia, in general, is doing great, and China, despite some small growth downgrades, is still pulling targeted stimulus measures to support credit expansion and boost ailing consumer confidence. International investors have mostly capitulated on China risk assets (-10bn last month, -70b YTD), whereas domestic investors are buying, and the setup looks attractive for value investing two years ahead.


Risky assets performed reasonably well this week on the back of: a) expectations that the rate hike cycle is over, b) a huge expiry today with a pin for SP500 at 4500, c) volatility at a steady downward trajectory, d) a number of conferences in the US that sparked some interest in financials and Cloud software names, e) the successful ARM IPO. On the latter, the valuation is unattractive, and the free float is small (4b), as 1b was allocated to cornerstone investors (Apple, NVDA, TSM) and Softbank desperately needed a win.


In terms of corporate news, the Smurfit/Westrock merger is interesting and accretive, and Inditex came with a solid set of q3 sales. Deutsche Telekom performs quite well, supported by a solid T Mobile 3-year guide. We continue to see a big rotation out of staples/low beta and into tech/industrial/high beta sectors. The ECB stands firmly against EU states imposing extra taxes on banks' profits (after the Meloni announcements), which is incrementally credit positive. I also found the Ursula comments on imposing tariffs on China EVs ridiculous enough to reveal the brewing anxiety of EU OEMs vs. the cheaper and better China autos. Cautious on the sector.

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