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Weekly Stories by Fathom, 19/10/2023

Good morning. Geopolitical tensions continue to escalate due to the Gaza conflict and the uncertain path of Iran policy. Regrettably, recent events in the Middle East have set the region back by approximately 40 years, and the historic truce between Israel and Saudi Arabia appears to be a thing of the past. This upheaval has had a significant impact on global financial markets.

Despite the ongoing geopolitical concerns, the risk-off sentiment for safe-haven bonds that we witnessed recently has faded away this week. This shift is partly due to a massive issuance of US government bonds and the US 10-year yield is once again testing its highs. The situation could be further aggravated next week as another $100 billion in US bonds is scheduled for issuance. Furthermore, the inability of the US House of Representatives to elect a speaker has raised concerns. This could lead to a potential government shutdown next month, posing credit risks and sending negative signals about the state of US economics and politics. As such, the much-needed stability in the rates market remains elusive.

We are now in the midst of a crucial corporate reporting period. US banks have delivered mixed results, with investment banks underperforming their commercial counterparts. However, the presence of significant unrealized losses and limited provisions for credit losses is a cause for caution. The healthcare sector has experienced a real downturn, with Pfizer issuing a substantial profit warning and Lonza following suit this week. AstraZeneca also reported weak performance in its cancer drug segment, and while Roche reaffirmed its guidance for 2024, the market remains skeptical. Nestle released a balanced report, citing a decline in volumes but an increase in prices, leading to a modest 2% decline in its stock. Procter & Gamble, on the other hand, stood out with solid free cash flow guidance, contrasting with the 10-15% derating seen in other major defensive stocks over the past six months.

ABB issued a profit warning due to soft new orders in the EU and Asia, which had a domino effect on other major industrial companies. ASML was honest in its assessment but provided guidance below expectations for the next year. In contrast, SAP delivered a robust performance, making it a bright exception in this reporting season so far.

It's also worth noting the recent developments in the electric vehicle sector, particularly the situation with Tesla, which has had ripple effects across the industry. Additionally, the export ban on Nvidia products to China is important, not only for the obvious reasons of affecting earnings per share but also for highlighting the risks associated with global investing in an increasingly polarized world.

Despite these challenges, there are opportunities in the market, particularly in undervalued, neglected sectors and regions. However, given the rapid contraction of liquidity, it's important for investors to exercise determination and patience when considering investments in areas that are currently out of favor, such as anything non-tech-related, the China market, and core European markets.

Alexandros Tavlaridis

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