Global markets weekly update

27.11.2023

U.S.

• US indices climbed for the fourth week in a row (S&P 500 +1%, Dow Jones 1,3%, Nasdaq +0,9%) in a holiday-shortened trading week in observance of the Thanksgiving holiday. Nearing the end of 2023, U.S. growth stocks maintained a big performance gap over their value style counterparts (+36,7% ytd on total return basis vs. 4,8%) – a sharp contrast from 2022 when value outpaced growth. Market volatility tracked by the VIX fell for the fifth consecutive week, down roughly 40% since its recent peak on October 20.

• The minutes from the Fed gave no indication of interest rates being cut anytime soon. Officials agreed that the Fed’s monetary policy needs to remain restrictive until figures show a persuasive trend that inflation will return to the 2% target.

• U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, was unchanged at 50.7 this month as a modest rise in services sector activity offset a contraction in manufacturing. However, employment in the private sector declined for the first time since June 2020, consistent with expectations for an economic slowdown in the fourth quarter.

•  With interest rates staying high, U.S. sales of existing homes in October fell 14.6% from the same month a year ago to the lowest level in 13 years.

Europe

• The Eurostoxx 600 ended the week 0,91% higher as hopes revived that interest rates had peaked and would soon be cut.

• ECB policymakers reiterated that their fight to curb inflation was not finished, dousing rate cuts hopes. ECB President Christine Lagarde said rates could be steady over “the next couple of quarters,” while France’s François Villeroy de Galhau said rates have reached a plateau where they will probably remain for the next “few quarters.”

• Eurozone Composite PMI fell for the sixth consecutive month in November, a sign of a pending recession.

Japan

• Japanese equities recorded subdued returns over the week, with the benchmark Nikkei 225 up 0,1% and the broader TOPIX flat. • Japanese core inflation ticked up to 2,9% in October, after easing the previous month, supporting investors’ views that persistent inflation may force the BoJ to normalize monetary policy.

•  The rate of inflation has remained above the central bank’s 2% inflation target for 19 consecutive months. The BoJ has asserted that inflation was largely driven by higher energy prices and a weaker yen, and not led by stronger domestic demand and wage growth. The central bank is expected to end negative interest rates and remove yield control in the coming months.

China

• Equities in China retreated as news that the government may introduce new stimulus measures for the property sector was not sufficient to counterweigh economic woes.

• Banks have been encouraged to strengthen support measures for real estate developers to reduce the risk of further defaults and ensure the completion of outstanding housing projects.

• Chinese banks left their one- and five-year loan prime rates unchanged. China remains an outlier among global central banks as it has maintained a looser monetary policy to revigorated a slowing economy.

Portfolio considerations

Fixed Income

We maintain our overweight in fixed income and more specifically in short-term quality corporate bonds in USD and in EUR. Fixed income has the potential to offer lower volatility, greater resilience, and better relative value to equities.

The latest employment report and inflation figures support the view that the Fed rate-hiking cycle can be complete, with labor-market conditions cooling enough to help inflation continue its inclination lower, while remaining healthy enough to avoid a severe recession.

As inflation and growth continue to moderate through 2024, interest rates are likely to drift lower. This environment presents an opportunity to start lengthening duration, while still favoring high-quality issuers. By locking in higher and attractive yields for a longer period, we can limit the reinvestment risk.

Equities

We doubt it will be smooth sailing from here as the lagged effects of high interest rates will continue to filter through the economy, driving softer growth, a gradual cooling in the labor market and consequently sparking bouts of volatility. Geopolitical tensions are also likely to fuel volatility. In addition, one cannot rule out the risk of the Middle East conflict transforming from a localized and temporary conflict to one that is prolonged and engulfs a larger range of countries. However, there is a compelling case for a favorable momentum as we close out 2023. In addition, not only have we entered a seasonally favorable period for equities, but data also supports an outlook for ongoing (albeit moderating) growth with a Fed that can remain on pause for a while. Our optimism remains nevertheless tempered and for this reason any rebalancing should be done in favor of quality names.

Global Markets weekly update

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