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Weekly Stories by Fathom, 22/02/2024

Good morning. Last week brought a surprise with the US CPI figures, which exceeded expectations, particularly highlighting the re-acceleration of service inflation month-over-month. This stirred some volatility across equities and bonds. Today, Europe's CPI remained consistent with core levels, registering at 3.3% year-over-year, while experiencing a modest decline of 0.4% month-over-month, as anticipated. Additionally, the EU service PMI rebounded to reach the neutral level of 50, surpassing expectations. These positive macroeconomic indicators have pushed recession concerns to the back burner. More importantly, the market is no longer pricing for headline CPI to reach the FEDs target over the next year (now at 2.5% from 2% in January). I think they are now more reasonably priced than at the beginning of the year. Both FED minutes and comments from 2 ECB speakers yesterday were on the hawkish side, suggesting that high wage pressure and a tight labor market should keep monetary policy tighter for longer.

 

In the equity market, major indices have been hitting all-time highs, reflecting a detachment from real yields over the past two months, thanks to abundant liquidity and prevailing investor sentiment. Although valuations currently seem unjustified based on historical patterns, the market's focus has shifted to individual stocks rather than broader trends. Notably, NVDA has been dominating discussions and driving market sentiment with its remarkable performance. While its valuation may seem somewhat high at 20-30 multiples, it pales in comparison to the inflated valuations seen in the Security and Cloud sectors, not to mention the exaggerated comparisons to the dot-com era. For instance, the recent news of OpenAI raising private funds at a valuation of 100 billion (equivalent to 50 times its sales, for a hyped LLM) has raised eyebrows, especially considering the challenges it may face, except perhaps from industry giant MSFT. This highlights the concentrated nature of market returns, with 70% of Europe's returns this year being driven by just three stocks (Novo, SAP, ASML), while the leading EU equity basket trades at a relatively high multiple of 26 times 2024 earnings (and EU is considered a cheap market...). 

 

Alexandros Tavlaridis

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