The Year of Answers is talking

22 April 2024

AT A GLANCE

The answers of Q1: global growth is faster and US inflation is stickier than initially expected
Imminent cuts from the Fed are increasingly unlikely, pressuring bonds, while geopolitics affect risk appetite
No TAA change in April. Due this week: US PCE, GDP, global manufacturing PMIs, major corporate earnings

All asset classes remained under pressure for a third consecutive week, with an evolving narrative on growth, inflation, and geopolitics.

Starting with the latter, Israel’s strike on Iranian soil increased the risk of escalation. Markets could not take it in their stride, although the drop in oil prices last week does not reflect outright pessimism. The US House passed a massive, combined aid package for Ukraine, Israel, and Taiwan – as well as some humanitarian aid for Gaza. This may stabilize the current tensions in our region, but potentially not so much in Eastern Europe and Asia. We still see geopolitics as a notable source of market volatility for this year, as against in 2023.

Economic data last week also confirmed upside surprises for the first quarter. China’s official Q1 GDP growth was surprisingly good, and most importantly for global markets, both US retail sales and the Philly Fed manufacturing index came in better than expected. No surprise then that several Fed officials, including Chairman Powell, made more hawkish comments. Market-implied expectations from Fed funds futures are now for just below two cuts for the year. Our own scenario was also toned down to 2 rate cuts, probably starting in September.

Still, our Tactical Asset Allocation Committee didn’t make any positioning change – we debated a reduction in equity risk, but decided to remain slightly overweight, as the current earnings season is promising, and as the recent market action has actually improved valuations. We confirmed our caution on duration: we overweight safe bonds, but with a ~2-year duration on govies and ~4 on segments with more carry. In the week ahead, we will look at US PCE inflation and GDP, global manufacturing PMIs, and major corporate earnings.

And here comes the volatility

Cross-asset Update

Gold (+14.1%) is the best asset class year-to-date, so far supported by BRICS+ central bank buying and geopolitical risks. We have always been convinced that, contrary to the public narrative, to get the longer-term direction of gold right one has to look at monetary factors, rather than contingent risks that are fickle in nature. And in this respect the drivers for the yellow metal are in place: the debasement of the US dollar and more in general of the DM currencies is continuing as their debt load grows unchecked. The IMF warned in its yearly report about the outstanding economic performance of the United States as being driven by an unsustainable fiscal policy. To be sure, China was also mentioned in negative terms for similar reasons, but in our view it is the US twin deficits alongside the budget trajectory that should be concerning us the most. This sets the positive tone for gold for the longer-term, while in the more immediate future on the other hand we cannot help take notice of the mounting headwinds after the recent bull run.

Monetary policy has turned into a net challenge for gold. The pace of central bank buying will most likely slow down at the current higher prices, even as the Fed’s rhetoric has changed significantly to turn more hawkish. As much as equities have yet to digest that hawkishness, gold will also have to come to terms with a much lower number of cuts discounted by money markets into year-end. We do not think that the yellow metal will be able to ignore that kind of tightening of financial conditions, hence we see it as vulnerable in the shorter term. Investors should not be buying at the current levels, but rather wait for better opportunities at lower prices. The forthcoming inflation readings are likely to keep the Fed on edge given that higher commodity prices should feed into the CPI and PCE gauges in the next couple of months. Also, the strength of the US economy is supporting the direction of travel of yields, that for now remains up. The US dollar has just broken out to the upside, on the outlook for a more favorable rate differential against G7 peers, and in particular against the euro. This represents an additional headwind, reflecting investor conviction that yields are not going to reverse course that soon.

Overall, we retain the view that gold is going to outperform equities should the expected downside materialize, but also that at these levels it is offering little value unless one is willing to ride out forthcoming market volatility. Gold has gone up with equities and we except that it would be pulling back with them eventually. Please do not focus on its supposed safe-haven status, but rather on monetary factors.

And here comes the volatility

Fixed Income Update

The Treasury curve bear steepened with the 2-year hovering around 5%. The 10-year yield is firmly above 4.5%. Markets now discount less than 2 rate cuts by end of the year and the first full rate cut only by September. We held our monthly tactical asset management committee meeting and retain our preference for cash and sovereign debt in the front-end of the curve. We haven’t added to duration and are hesitant to do so. It will take multiple softer inflation and labour market reports for markets to regain confidence in a more dovish Fed path.

Our inhouse economist view is that geopolitics could have an upside risk to US inflation. Headline inflation could tick a little higher in the next few months and the strength of the US economy doesn’t warrant cuts. We have pushed our outlook to two rate cuts this year with July/September the first and the second expected in the 4th quarter. For the ECB we expect 3 cuts, probably the first in June. For the BOE 2 cuts this year, not too aggressive. The UK has seen some improvement in economic data. Treasury yields continued higher, and spreads widened following a week of hawkish Fedspeak and strong economic data.

The market must absorb a combined $183 billion calendar of two-, five- and seven-year note sales this week. The 2 year at 5% marks an interesting flux point for investors. We suggest clients to move to 2-year treasuries from T-Bills or money market funds since the 2-year is trading close to the Fed policy rate lower bound of 5.25%. This allows investors to lock-in these high yields for 2 years while avoiding long duration exposure.

The most important driver for yields this week is the Fed’s preferred inflation gauge (PCE) releases due on Friday. It is seen accelerating slightly to 2.6% on an annual basis as energy costs rise. Any upside surprise would lead to a sell-off in bonds. We also have the preliminary readings of the PMI data on Tuesday and consensus estimates point to a confirmation of the manufacturing rebound that is underway. Yields should have an upward bias this week with all these data points in play.

We have experienced insensitivity of spreads to yields at the current level of yields. Investors continue to believe that these yield levels are very attractive, and this is limiting the spread volatility even as broader volatility gauges are higher, as is currently the case with the MOVE index. Looking ahead, the focus is going to be on earnings, with 32% of the S&P reporting results this week. Any weakness in earnings is set to exacerbate the move in spreads.

And here comes the volatility

Equity Update

Geopolitical tension on the rise, with an escalating Israel Iran standoff, so far contained has led to a stronger USD, higher oil and gold. At the same time a still strong US economy and low unemployment, inflation numbers above estimates are indicating higher rates and yields for longer. So far in April, global equities have fallen 5% leaving YTD gains at 2.7%. Close to flat performance in April or slightly positive are the KSA, India, UAE and the UK. Sharply lower are the US and Japan. Still leading USD YTD returns are India, Japan and the US though leadership has shifted away from Japan. In global sectors energy leads, with tech/ communication services a close second, in spite of the recent dip. All three sectors have gains of c. 10% YTD. Expect more volatility in markets till the earnings season in the US is almost done.

At our monthly tactical asset management committee meeting, post a quarter end reset we are slightly overweight equities. While higher rates could impact profits the consumer stays strong in the developed market regions. We prefer Japan and are neutral the US. We will look to be more active and add tactically if a further correction occurs. The mid- to longer-term horizon looks well supported. What’s good for US equities is that in spite of the higher rates the consumer is in good shape and if people are employed will keep spending money. Rates are higher but financial conditions have eased as the strong 2023 equity rally continuing into 2024 has been good for wealth creation. Housing ok as mortgages tied at 2% for most borrowers.

In emerging market equities, a preference for India for growth and the UAE for dividend income. Neutral China as debt, deflation, demographics and increased US tariffs remain long term challenges. Reflationary measures and debt restructuring are getting into shape, but more is needed to deal with the property crisis. A contrast with India with domestic and international inflows into equities. Indian economic and productivity growth stand out as does its resilient earnings growth. In the UAE expect capital issuance to continue adding breadth and depth. Higher oil prices and increasing non-oil revenue will continue to raise economic growth. Increasing population and economic reforms are encouraging industry and global financial firms to set up base in the UAE.

US earnings so far more about reaction to guidance than numbers. Earnings growth +6/7% y/y for banks yet mixed performance. Netflix grew paid subscribers, but shares fell post the call. LVMH grew revenue as Japan saw increased demand but China disappointed.

On tec: TSMC shares fell 6% after it cut back its outlook for a chip market expansion. Q1 results beat with fastest revenue growth since Nov-22, and better than expected Q2 revenue forecast. TSMC still positive on longer-term AI chip trends, seeing AI processor revenues doubling this year, however more uncertainty around broader chip demand, particularly after ASML reported disappointing net bookings. Big tech has Nvidia with 50% YTD gains, with Tesla at -40% in 2024 so far. Plenty of tech earnings this week with 40% of the S&P 500 reporting.

And here comes the volatility

Written by:

Maurice Gravier Chief Investment Officer , MauriceG@EmiratesNBD.com
Anita Gupta Head of Equity Strategy , Anitag@EmiratesNBD.com
Satyajit Singh Fixed Income Analyst , SatyajitSI@EmiratesNBD.com
Giorgio Borelli Head of Asset Allocation , GiorgioB@EmiratesNBD.com

Disclaimer

This document is prepared by Emirates NBD Bank (P.J.S.C) (“the Bank” or “Emirates NBD”), a public joint stock company incorporated in Dubai, United Arab Emirates (UAE) and licensed to provide various financial services including promotion, financial consultation, securities portfolio management, managing investments of investment funds, etc. Emirates NBD is regulated supervised and controlled by the Central Bank of the UAE (“Central Bank”) and the Securities and Commodities Authority of the UAE (“SCA”), having its head office at Baniyas Road, Deira, PO Box 777, Dubai, United Arab Emirates. This document may be distributed and/or made available by the Bank and its affiliates and subsidiaries, including Emirates NBD Capital KSA CJSC (“ENBD Capital”) (through its website, its branches or through any other modes, whether electronically or otherwise).

Emirates NBD and its affiliates, subsidiaries and group entities, including its shareholders, directors, officers, employees and agents are collectively referred to Emirates NBD Group.

This publication is prepared without regard to the individual financial circumstances and objectives of persons who receive it. Data/information provided in this publication are intended solely for illustrative purposes for the general information or its recipients, irrespective of their customer classification as an Ordinary Investor or Professional Investor under the SCA Regulations.

Any person (hereinafter referred to as “you”, “your”) who has received this document or have access to this document shall acknowledge and agree to the following terms.

Reliance

This publication may include data/information taken from stock exchanges or other third-party sources from around the world, which Emirates NBD reasonably believes to be reliable, fair and not misleading, but which have not been independently verified. The provision of certain data/information in this publication may be subject to the terms and conditions of other agreements to which Emirates NBD is a party. Opinions, estimates and expressions of judgment are those of the writer and are subject to change without notice. Emirates NBD or any member of Emirates NBD Group makes no representation or warranty and accepts no responsibility or liability for the sequence, accuracy, completeness or timeliness of the information or opinions contained in this publication. Nothing contained in this publication shall be construed as an assurance by Emirates NBD that you may rely upon or act on any information or data provided herein, without further independent verification of the same by you.

The contents of this document are prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors, including those relevant to the determination of whether a particular investment activity is advisable. Emirates NBD does not undertake any obligation to issue any further publications or update the contents of this document. Emirates NBD may also, at its sole discretion, update or change the contents herein without notice. Emirates NBD or any member of Emirates NBD Group does not accept any responsibility whatsoever for any loss or damage caused by any act or omission by you as a result of the information contained in this publication (including by negligence).

References to any financial instrument or investment product in this document are not intended to imply that an actual trading market exists for such instrument or product. Certain investment products mentioned in this document may not be eligible for sale in some jurisdictions, and they may not be suitable for all types of investors. The information and opinions contained in this publication is provided for informational purposes only and have not been prepared with any regard to the objectives, financial situation and particular needs of any specific person, wherever situated. If you wish to rely on or use the information contained in this publication, you should carefully consider whether any investment views and investment products mentioned herein are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You should also independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professional advisers or experts.

Confidentiality

This publication may be provided to you upon request (and not for distribution to the general public), on a confidential basis for informational purposes only, and is not intended for trading purposes or to be passed on or disclosed to any other person and/or to any jurisdiction that would render the distribution illegal.

Solicitation

None of the content in this publication constitutes a solicitation, offer, recommendation or opinion by Emirates NBD to buy, sell or trade in any security or to avail of any service in any jurisdiction. This document is not intended to serve as authoritative legal, tax, accounting, or investment advice regarding any security or investment, including the profitability or suitability thereof and further does not provide any fiduciary or financial advice. This document should also not be used in substitution for the exercise of the prospective investor’s judgment.

Third Party

This publication is not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law or regulation. It is the responsibility of any person in possession of this publication to investigate and observe all applicable laws and regulations of the relevant jurisdiction. This publication may not be conveyed to or used by a third party without the express consent of Emirates NBD or its affiliates, subsidiaries or group entities distributing this document. You should not use the data in this publication in any way to improve the quality of any data sold or contributed by you to any third party.

Liability

Notwithstanding anything to the contrary set forth herein, Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries shall not, directly or indirectly, be liable, in any way, to you or any other person for any: (a) inaccuracies or errors in or omissions from this publication including, but not limited to, quotes and financial data; or (b) loss or damage arising from the use of this publication, including, but not limited to any investment decision occasioned thereby. Under no circumstances, including but not limited to negligence, shall Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries be liable to you for direct, indirect, incidental, consequential, special, punitive, or exemplary damages even if Emirates NBD has been advised specifically of the possibility of such damages, arising from the use of this publication, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business.

This publication does not provide individually tailored investment advice and is prepared without regard to the individual financial circumstances and objectives of person who receive it. The appropriateness of an investment activity or strategy will depend on the person’s individual circumstances and objectives and these activities may not be suitable for all persons. In addition, before entering into any transaction, prospective investors should: (i) ensure that they fully understand the potential risks and rewards of that transaction; (ii) determine independently whether that transaction is appropriate given an investor’s investment objectives, experience, financial and operational resources, and other relevant circumstances; (iii) understand that any rates of tax and zakat or any relief in relation thereto, as may be referred to in this publication may be subject to change over time; (iv) consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment; (v) understand the nature of the investment and the related contract (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk; and (vi) understand any regulatory requirements and restrictions applicable to the prospective investor.

Where this publication provides any information about Shariah compliant products, the Bank will not have engaged a Shariah board (or similar body) to determine independently whether or not such products are compliant with Shariah principles. The Bank accepts no liability with respect to the fairness, correctness, accuracy, reasonableness or completeness of any such determination or guidance by any Shariah board that has certified or otherwise approved such products as Shariah compliant. Nothing contained in this publication shall be construed as a recommendation by the Bank to invest in such product. In deciding whether to invest in Shariah compliant products, you should satisfy yourself that investing in such products will not contravene Shariah principles. You should consult your own Shariah advisors as to whether investing in such products is compliant or not with Shariah principles.

Forward Looking

Past performance is not necessarily a guide to future performance and should not be seen as an indication of future performance of any investment activity. The information contained in this publication does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. Certain matters in this publication about the future performance of Emirates NBD or members of its group (the Group), including without limitation, future revenues, earnings, strategies, prospects and all other statements that are not purely historical, constitute “forward-looking statements”. Such forward-looking statements are based on current expectations or beliefs, as well as assumptions about future events, made from information currently available. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “seek”, “believe”, “will”, “may”, “should”, “would”, “could” or other words of similar meaning. Reliance should not be placed on any such statements in making an investment decision, as forward-looking statements, by their nature, are subject to known and unknown risks and uncertainties that could cause actual results, as well as the Group’s plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Risk

Data included in this publication may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, and credit risk. Emirates NBD may use different models, make valuation adjustments, or use different methodologies when determining prices at which Emirates NBD is willing to trade financial instruments and/or when valuing its own inventory positions for its books and records. The use of this publication is at the sole risk of the investor and this publication, and anything contained herein, is provided "as is" and "as available." Emirates NBD makes no warranty of any kind, express or implied, as to this publication, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.

Investment in financial instruments involves risks and returns may vary. The value of investment products mentioned in this document may neither be capital protected nor guaranteed and the value of the investment product and the income derived therefrom can fall as well as rise and an investor may lose the principal amount invested. Investment products are subject to several risks factors, including without limitation, market risk, high volatility, credit and default risk, illiquidity, currency risk and interest rate risk. It should be noted that the value, price or income of securities denominated in a foreign currency may be adversely affected by changes in the currency rates. It may be difficult for the investor to sell or realise the security and to obtain reliable information about its value or the extent of the risks to which it is exposed. Furthermore, the investor will not have the right to cancel a subscription for securities once such subscription has been made. Prospective investors are hereby informed that the applicable regulations in certain jurisdictions may place certain restrictions on secondary market activities with respect to securities.

Before making an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment. In receiving this publication, the investor acknowledges it is fully aware that there are risks associated with investment activities. Moreover, the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described in this publication and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with the investor.

Intellectual property

This publication has been developed, compiled, prepared, revised, selected, and arranged by Emirates NBD and others (including certain other information sources) through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, and money and constitutes valuable intellectual property of Emirates NBD and such others. All present and future rights in and to trade secrets, patents, copyrights, trademarks, service marks, know-how, and other proprietary rights of any type under the laws of any governmental authority, domestic or foreign, shall, as between the investor and Emirates NBD, at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties.

Except as specifically permitted in writing, you should not copy or make any use of the content of this publication or any portion thereof or publish, circulate, reproduce, distribute or offer this publication for sale in whole or in part to any other person over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet or construct a database of any kind. Except as specifically permitted in writing, you shall not use the intellectual property rights connected with this publication, or the names of any individual participant in, or contributor to, the content of this publication, or any variations or derivatives thereof, for any purpose. This publication is intended solely for non-commercial use and benefit, and not for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. By accepting this publication, you agree not to use, transfer, distribute, copy, reproduce, publish, display, modify, create, or dispose of any information contained in this publication in any manner that could compete with the business interests of Emirates NBD. Furthermore, you should not use any of the trademarks, trade names, service marks, copyrights, or logos of Emirates NBD or its subsidiaries in any manner which creates the impression that such items belong to or are associated with you, except as otherwise provided with Emirates NBD’s prior written consent. You shall have no ownership rights in and to any of such items.

IMPORTANT INFORMATION ABOUT UNITED KINGDOM

This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the London branch of Emirates NBD Bank (P.J.S.C) which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority in the UK. Some investments and services are not available to clients of the London Branch. Any services provided by Emirates NBD Bank (P.J.S.C) outside the UK will not be regulated by the FCA and you will not receive all the protections afforded to retail customers under the FCA regime, such as the Financial Ombudsman Service and the Financial Services Compensation Scheme. Changes in foreign exchange rates may affect any of the returns or income set out within this publication.

IMPORTANT INFORMATION ABOUT SINGAPORE

This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the Singapore branch of Emirates NBD Bank (P.J.S.C) which is licensed by the Monetary Authority of Singapore (MAS) and subject to applicable laws (including the Financial Advisers Act (FAA) and the Securities and Futures Act (SFA). Any services provided by Emirates NBD Bank (P.J.S.C) outside Singapore will not be regulated by the MAS or subject to the provisions of the FAA and/or SFA, and you will not receive all the protections afforded to retail customers under the FAA and/or SFA. Changes in foreign exchange rates may affect any of the returns or income set out within this publication. Please contact your Relationship Manager for further details or for clarification of the contents, where appropriate. For contact information, please visit www.emiratesnbd.com.

IMPORTANT INFORMATION ABOUT EMIRATES NBD CAPITAL KSA CJSC

Emirates NBD Capital KSA CJSC (“ENBD Capital”), whose registered office is at P.O. Box 341777, Riyadh 11333, Kingdom of Saudi Arabia, is a Saudi closed joint stock company licensed by the Saudi Arabian Capital Market Authority (“CMA”) under License number 37-07086 dated 29/08/2007G (corresponding to 16/08/1428H) to deliver a full range of quality investment products and related support services to individuals and institutions in the Kingdom of Saudi Arabia. ENBD Capital is subject to Capital Market Law, and Implementing Regulations in the Kingdom of Saudi Arabia

ENBD Capital’s contact details are T +966 (11) 299 3900 and F +966 (11) 299 3955.

This document may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Investment Funds Regulations issued by the Capital Market Authority.

The Capital Market Authority does not make any representation as to the accuracy or completeness of this document, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. Prospective subscribers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities offered. If you do not understand the contents of this document, you should consult an authorised financial adviser.

more app