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Weekly Stories by Fathom, 18/01/2024

This week, the markets have begun to process news flows more actively. In terms of USD rates, remarks from Waler had a noticeable impact as he pragmatically highlighted that consumer spending has improved and the market may be ahead of itself in pricing in rate cuts for this year. The FED speaker adheres to the FED dot plot, leading to a slight parallel retrace in rates. The expected buy point for duration extension in the US10y is seen above 4.7% at this point.

 

Lagarde's recent speech maintained the same stance, suggesting that the ECB will cut rates this year, but the plan is for the second half and at a more gradual pace than the market anticipates. The consensus remains that central banks will cut rates, but the trading plan for the year hinges on the timing and magnitude of these cuts, set against a backdrop of significant supply and declining USD liquidity in the second half.

 

European fixed income has had a strong start in January, on track to print 150 billion euros of new bonds for the month, with more than half coming from governments, mainly targeting longer durations. The US is not far behind, with financials leading the issuance to cover their refinancing needs.

 

In risk markets, interesting moves have been observed. Indices, except for NASDAQ, have given back their December gains. China is the most significant loser, facing deeply negative investor sentiment. The catalyst for this week's deep selloff was the latest comments from their political leaders in Davos that all but delayed the big fiscal boost that the market was eagerly expecting. The market has been aggressively selling cyclical names with high exposure to European consumers and energy/materials sectors. Both are rational actions, as a way to express slower growth and lower spot commodity prices. More important for short-term price action is the reopening of sizable shorts from long-short hedge funds, after the short-covering rally in the last two months of 2023. A notable new player in European equities is the combined entity of UBS and Credit Suisse, which has reactivated its equity research and asset management participation.

 

Regarding company-specific news, the quarterly reports from major US banks were notable, with JPM performing well and BAC being terrible in my opinion. The Boeing saga continues as the FAA takes a stronger role (of the quality inspector, as the management focused more on financial targets than making reliable airplanes). Novartis walks away from the costly buyout of CYTK (a rational decision that took some hot air out of the biotech sector). In Europe we had a couple of equity placements to start the year, but nothing interesting yet. In the past 6 months, I have engaged again cautiously with the UK market and can detest that it continues to be a bombed-out, illiquid, and tough marketplace.  

 

 

Alexandros Tavlaridis




 

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