Good morning. As we discussed over the past month, the prevailing themes in the markets continue to be the bear steepening of the yield curve and the rising price of oil. Yesterday marked a historic event in the rates market, with the US 30-year hitting the 5% level and Germany's 10-year dropping to 3% (a 15-year high for both). Central bankers seem somewhat clueless in the face of these developments, with Powell referencing "cloudy skies," Ueda attempting to stimulate domestic bond demand (while the JPY sits at deeply negative real rates), and Lagarde, well, shopping at Hermes.
It appears they may have lost control of the market beast. The indigestion caused by the out-of-context US debt issuance and the technical deleveraging of the massive CTAs are pushing bond total returns into negative territory. Yellen's optimistic outlook was also underfunded, both in terms of economic forecasts and debt servicing costs. Given these factors, I believe we should be looking at increased odds of a significant credit event and some kind of floor forming in the oversold rates market. The recent crash in the oil market, again triggered by CTAs, will likely help, with a 7% drop as it broke through the 90.5 neckline.
Personally, I don't place much stock in the US job opening numbers, as they often seem fictitious, akin to my own struggles to find a nanny at 700 euros. The ISM services index did moderate as expected, but what's more significant is the new orders component dropping from 57.5 to 52. I anticipate that from Q4, the real economy sectors such as retail and construction will stall, leading to new rounds of layoffs, much like what we saw in the tech sector in Q4 2022.
Turning to the corporate calendar, it's a busy time with numerous conferences and corporate plans for the next three years. The broader picture indicates real estate is struggling, as evidenced by another rights issue in a Belgian REIT at all-time lows. Finance is holding up well, tech remains resilient, energy is generating significant cash, and defensives are a diverse mix, mostly experiencing a mild derating due to rising rates. US utilities have taken a historic beating over the past month, especially after the Nextera profit warning and their debt-heavy balance sheets. This trend is also seen in EU utilities, though to a lesser extent, thanks to regulatory-set returns. Nothing particularly interesting there yet.
In Europe, we've seen a significant profit warning from train maker Alstom, (-35% due to cash flow generation). Not a great situation for the company. In the past week, we've had three significant spinoffs: Kellogg's (which I find worse than before), Danaher/Veralto (which is interesting), and the long-awaited Novartis/Sandoz (which I like and have participated in).
Alexandros Tavlaridis