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Image: Peace Piece


Peace Piece

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Israel and Hamas have agreed on a temporary ceasefire as we go to press, which is a reason to celebrate with this solo jazz piano masterpiece from Bill Evans (Peace Piece).
  • From an investment perspective, this is also a positive development that has stabilised oil prices, a win-win situation for the inflation and monetary policy outlook.
  • The current nearly USD80/b for Brent, which is also our expectation for 2024 on average at Kepler Cheuvreux, is a sweet spot for both consumers (non-inflationary, high enough to incentivise energy transition) and producers. The breakeven fiscal oil price, which stabilises public finances, is at USD80/b or below in Gulf countries. Saudi Arabia has thus no reason to push oil prices higher, and dissension among OPEC+ members actually involves downside risks.
  • The euro area CPI, which will be released next week for November, thus has room to continue surprising on the downside. The ECB doesn’t look impressed for now, which is not a surprise. We expect the cat-and-mouse game between central banks and markets to continue into year-end and until inflation falls below 3% for some months (it was already at 2.9% in October in the euro area).

After the November market rebound in every financial asset (except energy), we reiterate a slight Underweight stance on equities and find more value in bonds. 

  • The S&P 500 is richly valued. No upward revisions to earnings expectations, which would bring valuations to more attractive levels, are expected on our side. We expect a rangebound equity market into year-end. 
  • For the medium term (H1-2024), we continue to believe that bonds are attractive versus equities. But bond markets are already challenging the guidance from central banks. The ECB is uncomfortable with the “dovish” market pricing, a source of risk for the bond duration factor in the near term. 
  • In Europe, economic surprises keep heading north, Germany’s IFO was better oriented and natural gas inventories stand at record highs. This has supported the EURUSD, but we see little additional upside at current levels. With regards to European equities, they are attractively valued but the value risk premia lose a tailwind with rates peaking. We continue to prefer Banks versus Autos within the European value segment in equities.

We have made to some adjustments in our asset allocation, without changing the overall equity stance (slight Underweight).

  • We increased our long USD bias with the EURUSD above 1.09.
  • We reinitiate a position on EM sovereign credit with spreads above 400 bps and risks in check.
  • We switch to cash in EUR as we now expect the ECB to cut rates earlier than the Fed in H1-2024.

Week ahead: 

  • The euro area CPI for November will be an important data point to watch next week, ahead of the mid-December ECB meeting, which is unlikely to see rate hikes, in our view.
  • In the US, house prices, consumer confidence, personal income & spending data, as well as the PCE deflator will influence the near-term bond market outlook.
  • Finally, business surveys will be available for November (ISM in the US, final PMI in Europe/ Japan). In China, the PMI will be an important milestone. Expectations are low. 

Asset classes performance (1 week)

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