In recent days, especially on the US market, there have been some events that are seen as key elements for the interpretation of the markets and therefore extremely useful for investors struggling with the choices to be made regarding the composition of the portfolio. Antonio Cesarano, Chief Global Strategist of Intermonte points out in particular three events that have provided useful information: Nvidia's quarterly, the auction of the 20-year US government bond and the Fed minutes. And he gives an interpretation of them with a football metaphor. Let's see how.
Wanting to choose from all the events that have happened in the last few days, which do you think were the ones that gave the best information to investors struggling with asset allocation?
In recent days there have been three events that have provided useful information for investors: the Nvidia quarterly, the 20Y Treasury auction and the Fed minutes. On the occasion of the publication of Nvidia's quarterly, the CEO managed to make people perceive how the maintenance of the astonishing rates of growth in profits for the future is credible, defining the demand for AI at the "tipping point", i.e. at a turning point. In other words, the increase in global demand is only just beginning. The US 2024-year Treasury bond auction was poorly received and several other metrics signal bond market fatigue. The strong thirst for bonds at the beginning of the year was largely satisfied by the copious primary in the first weeks of XNUMX. Finally, the minutes of the Fed meeting in January indicated that there is no rush to cut rates but, in the meantime, in March the slowdown of the budget decline will be discussed.
How can we interpret the market based on these three elements?
The three elements help to understand the current market alignment (stocks at historic highs in various parts of the world despite the UK, Japan and probably Germany in recession), which can be associated with a football metaphor.
How do you see the football metaphor?
First I see the aattack with two tips
• Nvidia with the ability to transform AI into profits is the "young" tip, which already scores many goals at just 18 years old and therefore promises even better in the future.
• Companies in more mature sectors that quickly increase payout ratios, distributing increasing shares of profit in the form of Buy Backs and dividends represent the most expert tip that comes from experience, putting into play above all the ability to translate the position. It should be noted that those who have been less generous in payout ratios have in several cases been penalized (not only, but also for this), such as Apple (-4% YTD).
He puts the central banks on defense?
A winning team cannot ignore an excellent defense with few goals conceded:
• The Fed which parries the blows for the regional banks with ad hoc liquidity lines (the BTFP) and others already present which are used liberally (the Reverse Repo which is rapidly emptying from around $2500 billion to the current around 550 billion) . à The Fed promises to always keep the defense well coordinated, declaring that at the next meeting on March 20th it will discuss the budget in depth, i.e. it will not let the system go into a liquidity crisis when some lines expire and/or go to zero.
• The ECB which has provided liquidity to the banks through the growing remuneration offered on deposits, now at 4%, to the point that (also for this reason, as well as for the minuses on the securities purchased in the zero interest rate phase) in 2023 it closed the balance sheet loss of €1,3 billion, for the first time in twenty years.
Who's left on the bench?
• The Mid&Small Caps remain on the bench waiting for the rate "switch" to turn downwards. The main indices on global Mid&Small Caps (Russell 2000 in the lead) have been practically at a standstill since the beginning of the year.
Students?
It will be the European defense sector, towards which huge resources will probably also be diverted from the energy transition. Von Der Leyen mentioned it after her official candidacy for the second term as President of the Commission and the Ecofin finance ministers discussed it, with particular attention to the funding methods, i.e. joint/EIB bonds
What happens in Japan and China in the meantime?
Japan takes advantage of both the recession (which postpones the BoJ's rate increase, keeps the Yen weak and supports exports) and China's lack of confidence. Capital flight from China benefits India and Japan. China, aware of having lost the trust of foreign investors due to the effects of the policy of common prosperity, plays autonomously, launching a mega government buy-back plan on shares/ETFs, especially mid-small, and tightening the rules on foreign sales discovery. Result: the CSI indices rise and Chinese retail, holding large quantities of securities indexed to the mid/small indices, reduces the risk of losses when they expire around mid-year.
What about the bond market?
In all of this, the bond market "takes a breather" on the wave of enormous primary issues, almost always well received, but little by little demand begins to be satiated.
What will happen on the various fronts in the future? What are the best opportunities to enter the market?
The rising rate curve between February and March may offer entry opportunities in view of a Fed that begins to intervene on liquidity, long before on rates. On rates, the maneuvers will probably arrive in the second part of the year (roughly the start is expected between June and July), in the face of signs of stabilization of inflation (the last mile of the decline is the most difficult part and most harbinger of doubts and prudence), but in the meantime liquidity will be the Fed's main maneuver.
With rates progressively decreasing from the second quarter/half-year, the "panchinari" i.e. the mid small caps could return to play, as already happened between November and December 2023. This without the players of the first round (AI and companies with a high payout ratio) perform poorly, if only in a relative sense. Gold, for its part, could continue to benefit from the trend of diversification from the dollar of global central banks with a target of 2330/2500 by the end of the year.
Regarding the euro exchange rate, do you see any different behavior during the year?
The fluctuation of the euro/dollar exchange rate is expected in the 1,06/1,13 range for the year, but with some distinctions to be made. In the first quarter the dollar will be stronger on average (the European economy offers its worst in this phase), in the second quarter there will be a return of the dollar towards 1,10 in view of the Fed's first budget maneuvers, in the third quarter once again the dollar will be stronger (in the period of the replenishment of gas stocks by Europe), the fourth quarter will be more uncertain: on the one hand the uncertainty for the US presidential elections and on the other the effect of the expansionary maneuvers of the Fed.
And what about the spread?
The spread in the first half of the year will be supported by two factors in particular: the purchase of BTPs by the banks to partially replace the interest margin with the ECB with that on the BTPs and the privatizations whose proceeds feed the debt amortization fund which could prove useful in the second half of the year, when the ECB will gradually eliminate the reinvestments of the PEPP plan, with the elimination of BTP purchases. As always, there are numerous unknowns: in addition to geopolitics, also the US elections with the possible victory of Trump, which in 2016 led to a rise in rates, but also to a strong benefit for mid&small caps.
