Download Last Monday we said: “Stocks have somewhat corrected, and futures traders have very short positions in bonds. There are now many scenarios in which one (or both) of these asset classes stage a rebound… we should not write off 2023 just yet. September and October are historically the worst months of the year by far. This means that regardless of the view we currently hold, there remains a likelihood that this is the worst this year has to offer. Can the balanced portfolio rise again before the year’s out? The answer is yes, we can still get our customary Santa Rally.” Last week was one ..read more

Download After 2022, the annus horribilis, it was widely assumed that 2023 would be a rebound year. However, up to the end of October, a 60/40 (MSCI World/Bloomberg Barclays Global Bond Index), was up a mere 2%, very far from the average uplift of 5% and 9% experienced in a rebound year. Last week was one of the worst weeks this year for equities, with many companies (Alphabet, Meta, Standard Chartered) losing value following below-expected forward earnings projections. Investors found refuge in bonds, with the US 10y yield coming off the 5% watermark. Meanwhile, the S&P 500 is now in cor ..read more

Download Since September, there have been two issues dominating markets: high yields and geopolitics. In the past few weeks, both have been exhausted. As far as the Middle East is concerned, we acknowledge that all outcomes are possible at this stage, from further escalation to de-escalation. It stands to reason that, while markets haven’t sold off, traders are nervous about the possibility of the former, while the latter could catalyse a Santa rally. The fact that markets haven’t reacted, to me it signals that they recognize risk is parabolic: either the conflict escalates (with obvious reper ..read more

Download Last week added two key pieces of information: A robust (ish) US labour market, and a flare-up of tensions in the Middle East. Both of these are important to portfolio holders, especially those with a large allocation in bonds, especially long-dated bonds. Let’s take things from the top. On Friday, the US announced a large jump in payrolls, which indicates that the labour market, and thus the economy, is strong, perhaps stronger than most economists expected at this particular juncture. Granted, unemployment didn’t tick down and hourly earnings did, but that’s all within the margin of ..read more

Download This inflation cycle is nearing its completion. In the US, core Personal Consumption Expenditure, the Fed’s favourite inflation gauge, fell below 4% for the first time since June 2021. If this Friday’s employment data are weak, it is possible that the Fed could focus on impending economic weakness and put an end to rate hikes altogether. As the world loses the benefit of an H1 Chinese resurgence, the economy is slowing down. And while a “soft landing” is the base case scenario for many investment firms, the level of confidence is low. For all their proclamations of a soft landing, aft ..read more

Download A consistent element of this rate hike cycle has been the differential between market optimism and Fed intentions. Since early 2022, markets were never really convinced about how far the Fed was willing to take things. Expectations have consistently fallen short of reality in terms of rate hikes. One can’t really blame traders for this of course. Most came up during the 14-year quantitative easing period. A zero-rate and unlimited quantities of free money, the scenario they once took as their base. The place where, for some,  the Fed might well mean revert one day.  It will ..read more

“Sell in May and go away”, the old traders say. This is not because markets fall in the summer. It is because volumes are low and signals are not trustworthy. In September traders return, and the month is usually the second worst for stocks. Despite robots doing much of the work these days, trading volumes in the summer were quite muted. Their human masters, it seems, don’t quite trust them with the shop while they are away. Why would they, by the way? ChatGPT, the face of the AI revolution, is losing subscribers and some of its lustre, as users complain that the model gives more wrong answer ..read more

Download The world’s eyes were set on the Fed’s annual symposium last week. Thousands of analysts stood at the ready to dissect even the tiniest morsel of new information. Consumption is stronger than expected, so Mr Powell’s cohort is set on keeping rates tight until either the economy or inflation recedes. And yet, the trajectory of interest rates is still anyone’s guess. Jerome Powell’s speech at Jackson Hole had a little in it for everyone. Some hawkish talk about raising interest rates if consumption continues to be strong and some dovish talk about the labour market. As such, there was n ..read more

Download Last Friday, UK GDP came in a tick higher than expected. Instead of the stagnant 0% expected by economists, the UK economy expanded by 0.2% over the three months to June. In this case, a 0.2% surprise is by no means insignificant. The fact that the economy was able to eke out growth in the face of already aggressive interest rate hikes will galvanise the Bank of England’s zeal to continue tightening monetary policy. Persistent inflation and runaway wage growth will be the BOE’s Public Enemy No.1, while faltering consumer confidence and business surveys will become an afterthought. Emp ..read more

Download The latest 25bps rate hike by the Bank of England takes the base rate to 5.25%. Interest rates in the UK haven’t reached these levels since March 2008 – the depths of the Global Financial Crisis. Nevertheless, there are tentative signs that the impact of interest rate hikes is beginning to be felt. Inflation is beginning to fall, and there are indications that labour market pressures are beginning to ease. Total job vacancies have declined from their post pandemic highs (although remain above their pre-pandemic trend, indicating demand for workers is still high), while the latest unem ..read more