The Week of Answers

04 November 2024

AT A GLANCE

US elections take centre stage, with the first projections expected Wednesday
The race is too close to call and we may not immediately get a clear and accepted results
We expect volatility, with also major updates from the Fed, China, earnings and economic data

Last week was negative across all asset classes except cash, which we believe was primarily linked to rising uncertainty around the US elections. The week was intense and data rich. Most economic releases confirmed an already known global picture, with an overall resilience driven by US exceptionalism. Still, there was a surprise: the US monthly job data was extremely disappointing, with only 12,000 jobs being created in October, a fraction of the median forecast for 100,000 and a sharp drop compared to September. Storms and strikes obviously had a strong impact, but such a miss cemented expectations for another rate cut on this Thursday’s FOMC, even if other data also questioned the progress of disinflation.

US elections are simply to close to call, and too hazardous to speculate on. First, there is no leader in polls anymore. Second, the composition of the Senate and House of Representatives will also matter. Third, the market implications are not obvious. More tariffs and less taxes and immigration could theoretically be better for stocks than for bonds, but stocks are at an all-time high and bond yields have materially risen recently. On the other hand, while Mrs Harris represents some continuity, details are unknown and congressional support is not a given. The key risk is actually not to have a clear and accepted result following the election night, which could hit risk appetite. We are more confident in the likelihood of the Fed to decide a 25 basis points cut on Thursday and prepared for good news from China’s congress. Still, we keep a defensive stance for the time being and will wait for more clarify to act.

Have a great week.

The Week of Answers

Cross-asset Update

Stimulus efforts seem to be coming together globally. In the United States onfgoing positive economic surprises had cast doubts on the degree of monetary easing lying ahead, until the release of the underwhelming jobs report on Friday. China continues to be hard to read for investors. Markets have never been impressed with the announced, nor the so-far-delivered measures, though we are starting to see unexpected improvements in key Chinese macro data. Europe is worst off in terms of growth and productivity outlook, hence further cuts are all the more due and expected. Hence, the upshot of all of this is that monetary easing is set to continue in the key macroeconomic areas, eventually supporting the business cycle and global equities.

If data is anything to go by, there has been a tight relationship between the share of central banks easing and the global manufacturing cycle. With more countries joining the monetary bandwagon, the goods sector, that so far has been languishing, should eventually inflect higher. And this stands to reason, being manufacturing, where fixed costs are elevated, highly sensitive to the cost of funding. Yet, the underwhelming release of the bellwether US ISM Manufacturing PMI, that on Friday sank to a new low of 46.5 for the year, does not seem to corroborate this analysis. But this is most likely due to election uncertainty lying right ahead, that should give then way to renewed investments in inventories and capital expenditure once it is clear who will be in office.

To be sure, we cannot fail to consider election scenarios in our analysis, as they will affect the economy and markets. And there are two unconventional scenarios according BoAML strategist Michael Hartnett that are favourable for both and not yet part of the public narrative. The unconventional Trump scenario could play out well for global growth despite the enforcement of tariffs. That would happen if central banks, to counter the effect of tariffs, cut rates aggressively, that alongside the currently depressed oil prices would constitute a significant easing of financial conditions and stimulate global growth. This would fall along the lines of what was just mentioned about policy easing going hand in hand with stronger manufacturing activity. Best played via non-US equities. The other unconventional scenario would be one of continuity. Kamal Harris is elected, tech leadership is unchallenged and global trade would not be suffering as much. Best played via US or Chinese technology.

While the election outcome remains highly uncertain, we know that the rising tide of liquidity will be positive for risk assets. But we also know that the currently relentless gold bull market could signal some trouble ahead. The rising tide of liquidity could ultimately be inflationary, never mind who is sitting in the White House.

The Week of Answers

Fixed Income Update

Intermediate Treasury yields extended higher for the sixth consecutive week, reaching their highest levels since late-July, and rising above their 200-day moving average in the process. The belly-led Treasury sell-off took place alongside similar moves across the DM, with US yields following last Monday’s European sell-off closely. At first glance, the backdrop for adding duration appears increasingly attractive for a couple of reasons. First, while we continue to expect two additional 25bp cuts, OIS forwards are pricing in only 43bp of cumulative Fed easing through year-end.

YTD, US IG bond yields have fluctuated within a 100bp range (4.9%-5.9%) and are currently near the midpoint. The increase in yields MTD, along with light supply and supportive equity markets, has driven spreads to their current tight level, and these drivers have not abated. MTD, HG has lost 2.2% in total return, leaving the YTD return at +3.3%. Over the past couple of weeks, there has been no evidence that the negative return trend is impacting fund demand, but this may change if yields continue to rise.

US High-yield bond yields rose 13bp to and spreads were stable at 332bp over the past week and are only 4bp above a post-GFC low as investors absorbed an in-line start to earnings season, strong economic data (claims, PMIs), and a further rise in Treasury yields. The HY index is providing a loss of -0.5% in October with CCCs (+0.5%) outperforming Bs (-0.4%) and BBs (-0.9%).

The trend has been mixed for EM fixed income, with some inflows in September after the Fed rate cut turning to outflows in recent weeks to leave the YTD figure at -$14bn. This continues to provide a stunning contrast to US HG, which is now running at +$327bn inflows YTD notwithstanding some slowdown in the most recent week. Our sense is that investors are in general delaying any meaningful allocation shifts until after the US elections, so we will need to wait another few weeks to see a turnaround.

The Week of Answers

Equity Update

We entered Q4 with a slightly underweight positioning in both DM and EM equities to lock in the strong performance already exhibited by most regions. Currently Overweight US/ UK within DM allocation, neutral Japan and underweight the Eurozone. We had moved our overweight stance from India to China within EM allocation and stayed Overweight the UAE as its capital market issuance remains robust and dividend yields are attractive.

Global equities were down in October and have fallen the last two weeks with the US influenced by mixed tech earnings, uncertainty on the US election outcome and the rate trajectory. However, year to date a strong performance with the MSCI ACWI +16% with China, the US and the Dubai Index with gains of over 20%. Tech leadership e evident in the MAG7 up 45%. Concentration risk continues as MAG7 is 37% of the S&P 500 and 50% of the performance with earnings at just 25%. For Q3 70% of companies have reported, S&P 500 earnings growth tracking at 5.2% y/y as is revenue at 5.2%. Spend in 2024 on AI capex at $250 bn by the MAG7 is worrying, with a large part of that on data centers. Not surprising with the huge amount of data storage required for cloud services and AI compute.

48 hours to US elections- potential changes in taxes, tariffs, immigration, labour policies could affect corporate earnings. The Vix is trading at 20, more volatility around uncertainty of a very equal outcome. However, the economy is fine, corporate earnings are robust with an outlook for low single digits growth next three quarters. Fiscal policy needs clearance from the House and Senate so not a unilateral decision. Both candidates seem to be focused on “Make in America” On taxes President Trump looks to lower the rate from 21 to 20% with 15% for companies that produce in the US. Candidate Harris could give tax breaks to start ups. On tariffs Pres. Trump 60% on China and 20% on rest of the world could add to inflation as cost of goods goes up. Any increase on taxes whether corporate or personal by Candidate Harris will lead to an impact on growth. We wouldn’t make any bets around elections as the Fed and markets will react to macro and corporate earnings quality. Stay invested in growth markets and sectors and quality stocks.

On earnings: Big Tech earnings offered a mixed picture. Microsoft and Meta fell largely due to high spending guidance on AI initiatives, which offset otherwise solid revenue results. Microsoft’s cloud business, in particular, projected slower growth, while Meta’s cautious spending plans unsettled markets. Amazon, rose 6% following a strong earnings report, supported by e-commerce strength and an optimistic forecast. Apple’s results were tempered by softer-than-expected demand for its new AI-enhanced iPhone in China, revealing challenges in a critical market for the company.

The Week of Answers

Written by:

Maurice Gravier Chief Investment Officer , [email protected]
Anita Gupta Head of Equity Strategy , [email protected]
Satyajit Singh Fixed Income Analyst , [email protected]
Giorgio Borelli Head of Asset Allocation , [email protected]

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