The risk-on rally has persisted this week, bolstered by a better-than-expected core CPI print and a scramble by quant trading accounts to cover sizable shorts. Regarding the CPI print, I won't delve into technical details, but while the trajectory is positive (falling), the data's quality is deteriorating, marked by substantial revisions and increased frequency. Core rates seem to have reached a plateau, and the market is pondering the extent of next year's rate cuts. The debate between a sharp deceleration (if Morgan Stanley's prediction of aggressive Fed cuts in H2 2024 holds) and a soft landing scenario (if Goldman Sachs' assertion of wrongly frontloaded rate cuts is accurate) is ongoing. Presently, I lean towards the latter view, avoiding a confrontation with the Fed and navigating the significant supply of sovereign issuance in 2024 ($8.5 trillion gross, $2.5 trillion net). I recommend staying with the belly of the curve as a core long and tactically trading the long end.
In the corporate bond space, the past ten days have witnessed the resurgence of corporate issuance, with even some high-yield offerings making their way to the market. Around $7 billion moved from money markets to credit in the past week (in ETFs), indicating a substantial switch, and corporations are promptly capitalizing on this window of liquidity.
Regarding equities, our stance from the beginning of the month remains: while Q3 performed well, Q4 2023 has seen downward revisions, affecting the 2024 outlook. Current market levels appear more a result of rerating due to lower long-term yields than healthy and sustainable EPS growth. Nevertheless, market breadth is gradually improving, and investors are turning their attention to reasonably valued companies beyond the popular few. In terms of flows, end investors are reallocating capital from NASDAQ to more balanced themes, with the US market recording significant inflows, while outflows from Europe and emerging markets persist.
In corporate news, RWE reported a decent quarter, the Siemens Energy saga concluded with state backing of €8 billion, and Diageo issued a significant profit warning related to Latin American volumes. Burberry also posted a profit warning today. On the positive side, Siemens provided reassuring guidance for next year, as did Infineon. From the US, Cisco's results were outright disappointing, and Palo Alto was cautious in its backlog guidance. The WMT bellwether was also rather cautious in its guidance.
Alexandros Tavlaridis