In the wake of recent decisions and statements from important central banks, we've witnessed a sharp repricing of risky assets over the past 10 days. This represents about a 4-5% decline in indices, and a more significant 10-15% drop in a median sample, albeit during a seasonally weak period. The most prominent macro development has been the relentless upward movement in long bonds in both the US and Europe.
The persistent rise in oil prices is seen as a potential trigger for this rate surge. However, unlike previous instances where rising oil prices dampened growth expectations, this time, they seem to be driving up inflation expectations. Several factors contribute to this bond market turbulence, including supply outstripping demand, negative carry trade, leverage ratio constraints, and substantial positions in US bond basis trading by hedge funds.
The evolving situation in US fiscal policy, often dubbed as "Bidenomics," appears to be a stimulative effort ahead of an election year. However, these measures could have risky repercussions in the medium term. Increased fiscal spending during periods of high inflation tends to exacerbate inflationary pressures. This, in turn, puts more pressure on the Federal Reserve to maintain a restrictive monetary policy.
One notable development has been the gradual depletion of strategic oil reserves, reducing the government's capacity to surprise the market with sudden supply actions. Instead, the oil pricing has been left to OPEC+ (cap on Russia oil anyone?) and fast-leveraged players, further contributing to oil price volatility. The rising deficits, coupled with high volume union strikes, set higher wage and inflation expectations, raising concerns.
With interest expenses nearing 5% of GDP, this becomes a significant concern for the nation's financial health. It is crucial that the US government addresses these issues promptly, hopefully before any major negative economic events occur.
Turning to corporate news, we've seen the highly anticipated IPOs of ARM and Instacart, both of which experienced initial enthusiasm followed by valuation-based corrections. Cisco's acquisition of Splunk generated considerable buzz. However, Amazon's investigation by the FTC appears somewhat out of context and belated, occurring approximately six years after the original filing document. In Europe, the market landscape has been challenging, with only selective sectors such as healthcare and energy showing resilience. Total presented a credible energy generation plan and Santander provided a decent dividend upgrade. Societe General was as usual underwhelming and the name took a steep loss. The weakening Euro is poised to lead to upgrades in the industrials and healthcare sectors, making certain stocks appear more appealing following recent corrections.