Good morning. The past week has been intense in terms of market action, notably in long rates. Following a quarterly sell off, 10y rates found a ceiling at 3% for Germany and 5% for US and after last Fridays washout price action after the strong payrolls numbers, they have corrected by 30bps each. Last week's market reaction to the Hamas invasion of Israel and the subsequent risk-off sentiment might have acted as a catalyst, but there are signs that the Fed is reconsidering its tightening cycle. Officials like Jefferson and Logan have voiced concerns that higher bond rates might hinder economic activity and that there may be less need for further Fed rate hikes. As a result, it seems that long rates need some time to consolidate at their current levels after this rally.
The upcoming US 20-year bond auction will be a significant indicator of any potential short-term moves in rates. While yesterday's auctions were lackluster, the bigger picture highlights concern about the US running a fiscal situation with consistently high deficits and a debt-to-GDP ratio at 120%, without facing negative repercussions. This issue, unfortunately, hasn't yet taken center stage in US political debates, but the market is well aware and will be the ultimate judge in the long run.
Regarding the situation in the Middle East, it's indeed a humanitarian disaster. The conflict's economic impact is of secondary importance compared to its human toll. The potential escalation of the situation in the Middle East could have implications for the price of oil and geopolitical stability, and much depends on Iran's stance in this conflict.
One of the best comments I came across, was that Westerns currently hate themselves for justifying mass bombardments in retaliation to the monstrous massacre of young women. This highlights the ethical dilemma that many are grappling with in the face of such violence. I can’t help wondering how Muslims (the silent majority, not the crazy fanatic types) across the world feel with such actions of terrorism.
In terms of corporate news, we had the much-awaited Birkenstock IPO that resulted of course in a flop. LVMH provided a cautious message for luxury spending and was marked down by 5-10% in the past month. I have no doubt that its fortress balance sheet and excellent management will help it whether this downcycle in consumer spending, but it may take some time. The postponement of another IPO in France (an interesting but expensive software firm) due to market conditions signals that capital markets are becoming more discerning, likely due to the increased cost of capital (still in the middle of the book, in my opinion). The efficacy of Novo's drug against CKD is one of the most significant developments this week. Undoubted one of these years’ biggest disruptors, kudos again to Novo (long and strong). The subsequent selloff in all Medical Devices/Services was very intense and I believe it will be a fertile hunting ground for next year, as currently thematic trading derates everything indiscriminately.