Good news is good news again

26 February 2024
goodnewsisgoodnewsagain

AT A GLANCE

  • Last week was very positive, with supportive activity indicators and stellar earnings from NVidia
  • Market expectations for rate cuts are now reasonable, leading to a focus on fundamentals
  • The week ahead will provide more color on the macro picture, especially on inflation

To paraphrase a famous idiom about ducks: if it looks like goldilocks, walks like goldilocks, and talks like goldilocks, then it’s probably goldilocks. This was one of the key messages from last week’s flash PMI indicators. Global growth continues to slow enough to keep disinflation alive, but most importantly, the sources of global growth are starting to be more diverse. Indeed, the US Services flash PMI came in below expectations, but the gauge for manufacturing surprised on the upside. Western Europe also displayed unexpected signs of life at the services level, while policy support continues to build up in China. Global growth should not be spectacular in 2024 but of higher quality, firing on several cylinders. This is good news, especially at a time when markets have priced out most of their previously unrealistic expectations for rate cuts, in keeping with the latest Fed minutes released last week. This means that good news for the economy is not bad news for all asset classes anymore - diversification works.

Against this backdrop, last week was positive for most asset classes, led by stocks, where the tech sector was turbocharged by stellar quarterly numbers (and very confident guidance) from Nvidia, now called “the most important stock on planet Earth” by Goldman Sachs. Of course, we’ve heard this kind of statement before – especially 25 years ago during the .com bubble. There is however a difference: the rally is not just multiples expansion on future hypothetical hopes, rather about actual supersonic earnings growth, quarter after quarter.

The week ahead will provide more colour on the topdown picture, from inflation in the Eurozone and Japan to China’s official PMIs and the US ISM Manufacturing, consumer confidence, and core PCE, the Fed’s preferred measure of inflation. Have a great week.

Good news is good news again

Cross-asset Update

Data-dependent is likely to be the name of the game going forward. The Fed is data dependent, carefully parsing every bit of evidence that can help divine the direction of the economy, so that monetary policy can be finely tuned, and accidents are avoided as far as possible. Markets have now run quite far since the late-October lows and investors will be awaiting further cues from the macro releases to decide whether risk assets have further to go. There is no more room for multiples expansion and with the Fed on hold till further notice both earnings and the labor market will be steering the future direction. And yields will be following hints from the Fed, hence we are back to square one with an eye to the economy. Longerdated yields in particular follow the direction of economic surprises, that recently have been on the very positive side and have pushed rates meaningfully higher year-todate. Gold as well has historically traded in line with expectations about changes in Fed policy, so what holds for yields holds for gold too, but in reverse. Meaning that the ‘higher for longer’ predicated of late by Fed officials on unexpected economic strength is not ideal for the yellow metal, that anyway has limited downside thanks to the ongoing purchases by the BRICS+ central banks.

The release of the business confidence surveys across the major DM countries last week gives us comfort about the direction of the economy in the near future. A manufacturing rebound is underway in the United States, while services activity has improved as much as to relieve stagnation conditions in the euro area and pull the UK out of its 4Q24 recession. In China it should be a matter of time before the plethora of drip-feed measures implemented by the authorities to support the private sector makes itself felt. Overall, the stabilization of the global economy and the improving business confidence should still support risk assets going forward. Yet, being markets now richly priced, it is unlikely that we see substantial gains without a pullback of some sort.

While the US recession case seems to have lost momentum, it is still an open question whether the final destination will be reached either via a soft- or a nolanding. The recent positive economic surprises suggest the latter may be true, that would be consolidating the view that rate cuts are held back, or might not even happen. For now, investors are advised not to be underweight risk assets, with an eye to add on market weakness. At the same time, an allocation to gold is recommended as a hedge against the ever-rising debt levels in the DM countries, and the more unstable geopolitical environment.

Good news is good news again

Good news is good news again

Good news is good news again

Fixed Income Update

Treasury long-dated yields came down despite hawkish Fedspeak, while credit spreads remained rangebound as heavy corporate issuance was met with strong demand. The FOMC minutes revealed that while members are pleased over recent good news on inflation, they aren't close to being ready to cut interest rates. At the same time, the FOMC isn't looking to hike rates again. The threshold to moving in either direction seems high for now, with policy guided by incoming data. Fed officials are readying a discussion of slowing QT. Fed staff noted that the consensus on Wall Street was that a tapering of QT would start by July.

Federal Reserve Bank of New York President John Williams said in an interview published Friday that the economy is headed in the right direction, and it will likely be appropriate to cut rates later this year. This week, a slew of Fed speakers will likely reiterate Williams's comments that the central bank doesn't feel pressure to begin cutting rates anytime soon.

IG bond spreads are at post-GFC tights as heavy supply is overwhelmed by strong demand. The path to even tighter spreads is through a continued equity rally and sustained attractive yields with a slowdown in supply. High-yield bond and loan maturities in 2024, 2025, and 2026 have been reduced by $472bn or 45% since YE22 to $585bn. HY is the only positive segment YTD within Fixed Income.

ADQ, an Abu Dhabi-based investment and holding company, has unveiled plans to invest USD35bn in Egypt. ADQ will acquire the development rights for Ras ElHekma for USD24bn to develop the region into one of the largest new city developments by a private consortium. As part of this investment, ADQ will also convert USD11bn of deposits that will be utilized for investment in prime projects across Egypt to support its economic growth and development. The subsequent step investors are looking at is Egypt's IMF deal now. This monetary support from the GCC should alleviate immediate debt servicing pressure. Option-adjusted spreads on Emerging Market bonds narrowed 5 basis points to 277 basis points over Treasuries in the past week, according to the Bloomberg EM USD Aggregate index. Egypt narrowed the most compared with other sectors.

The region continues to witness strong primary issuances, totalling approximately $30bn year-to-date, compared to about $62bn for fiscal year 2023. Today, we have seen a mandate announcement from PIF for its 7- year sukuk and Alinma Bank's for Tier-1 issuance. Alinma Bank is the fifth largest bank in KSA and holds a 6.4% asset market share. Additionally, DIB issued a 5-year sukuk expected to price around 80-90bps over the treasury, which currently translates to around 5.05% to 5.15%.

Good news is good news again

Good news is good news again

Equity Update: Our outlook for 2024

Global equity markets rose to their highest level ever last week driven by a mix of solid economic growth in the US, optimism that inflation will continue to come down and the artificial intelligence euphoria. The MSCI ACWI Index closed at 761, passing its previous peak back in 2021. The S&P 500 was up +1.67% last week; also closed at an alltime high of 5,088. Global stocks from US to Europe and Japan hit all-time highs as Nvidia’s outlook reignited the artificial intelligence frenzy. Equities were also supported by solid manufacturing, housing and labour-market data.

Within the Euro-zone, the Stoxx 600 Index is up +1.14% for the week as data points to an economic recovery. Business activity within the Euro-zone showed improvement in February, with the services sector returning to growth. As the US charged higher, European equities now have attracted investors as valuations look more attractive, trading at a record discount relative to the US. The largest stocks within the index are benefiting from broader trends such as healthcare and drug innovation; big contributors in recent months include Novo Nordisk and LVMH. In Japan, the Nikkei 225 surpassed its bubble-era peak, ending the week +1.61% higher driven by gains in chipgear producers after Nvidia’s blowout revenue forecast. Japan is anticipated to end negative rates later this year, a positive sign and encouragement for companies to put their cash to work on expanding and improving their business. The Japanese market is more diverse now as opposed to the 1980’s in which banks were the heavyweights in the market. Now, companies in tech, auto, retail and entertainment sectors have become new key players. China had a stunning reversal last week as the Shanghai Shenzhen Index posted its 9th consecutive day of positive gains, up +3.67%. State funds are drumming up the market and policy reaction by Beijing shows that it is determined to end the rout. Now state funds have broadened their target to include small caps, as opposed to previous attention to larger companies. UAE markets declined for the week tracking oil prices.

All eyes were on Nvidia’s spectacular earnings results last week. The company added $277 billion to its market cap post report with blockbuster numbers; shares jumped as much as 16%. That is the biggest single increase in value ever, coming ahead of Meta Platform’s single day gain of $197 billion. This year alone, Nvidia rose almost 60%, adding more than $700 billion; and briefly touched the milestone level of $2 trillion mark on Friday, to end the day at $1.95tn. Demand for AI is surging worldwide, and Nvidia’s beat on earnings is incredible considering the bar was already set high. Investors continue to bet that the company will remain the prime beneficiary of the AI boom. Nvidia’s largest customers are heavily investing in AI computing, such as Amazon, Meta Platforms, Microsoft and Alphabet, in which they account for 40% of its revenue. Nvidia’s surge has been crucial to the S&P 500's gains, contributing to more than 25% of the stock index's rise this year. Within the magnificent seven, there is now a clear divergence in performance as Nvidia is up 59% YTD while Tesla is down 23%.

Good news is good news again

Good news is good news again

Good news is good news again

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