The Aesop Lesson
Monday, 20 November 2023 08:47
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We all heard “The Boy Who Cried Wolf” fable from Aesop about a young boy falsely claiming that a wolf is attacking the villages’ sheeps. Villagers became skeptical and did not come to his rescue when the wolf did come for real.
In our financial world, the market asked economists to stop "crying the US recession” because so far there is no sign of it.
- This initial market posture started in September in the face of spectacular US consumption numbers, which contributed to push Treasury yields higher… which in turn pressured equities. Back then, in early October, we warned that the “higher for longer” theme (engineered by the Fed’s communication on top of US fiscal policy concerns) could increase recession odds. All the more as it appeared the Fed would welcome further economic weakness to suppress inflationary pressures once and for all.
So far though, economic data and the dramatic decline in oil prices rather suggest a gentle and welcome slowdown is under way, with much better news on the inflation front. US bond yields came down as a result, and US tech/ growth stocks enjoyed a strong rebound.
- The Nasdaq 100 is now back to its July top, despite higher long term real interest rates and a more aggressive guidance from the Fed regarding the level of interest rates at the end-2024 horizon (5.1% vs. 4.6% in early H2). Consensus earnings expectations were revised up by 8% since the end of July, but we now expect a broadening of the market rebound beyond Tech and growth stocks.
This week has actually seen the “risk on” mood extend beyond the Nasdaq, including European and Chinese equities. Why sell equities if earnings are not going to fall much? Also, the equity world excluding Big Tech is not particularly expensive. In today’s report, we show that other risk assets such as the Euro is enjoying that phenomenon. Fundamentally we struggle to defend the case for a much stronger euro from here, but timing wise, there is nothing obvious to fight the above narrative without taking the risk of “crying wolf”. Our only point of caution is that the signals from the earnings season weren’t great. But this is now a mid-January discussion.
Specifically on European equities, this week we discuss Real Estate. We have been OW for some time because we wrongly anticipated an earlier peak of interest rates, but also because implicit assets’ values reflected in listed stocks were truly too low. Now that there is a consensus on peaking bond yields, the sector is back on investors’ radars. Our equity analysts just organised a big conference in London that was highly popular. Fundamentals are still deteriorating but markets are very much aware. The rerating has further upside. Liquidity works both way!
Week ahead: the macro and earnings newsflow will be light, though on the policy front the Fed minutes from the November 1st FOMC meeting can have market implications. Apart from that, business surveys will be available: preliminary PMIs in developed countries as well as the IFO business survey in Germany (for November).
Asset classes performance (1 week)
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