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Perhaps in the current context, with an unprecedented rebound in financial markets, whose performance from November to today is reminiscent of the post-recession phase in both intensity and speed, even though, for now, there is no recession, I think Nat Friedman’s famous quote is valid: “Pessimists sound smart, optimists make money”. Psychological terrorism in financial markets is a common practice, and I think there are three reasons for this: (i) since these are probabilistic scenarios, arguments can always be found in favor of negative scenarios; (ii) negative news has a stronger emotional impact than positive news, and loss aversion makes the “perceived” loss of value for a given (actual) loss of the same entity greater than the “perceived” gain of value for a given (actual) gain of the same entity; and finally, my favorite, and obviously (iii) it makes people look smarter, and perhaps due to distorted logic, those who emphasize the problem are considered to look smarter than others. However, reality gives us a very different result, as a “contrarian” attitude can push people to make bad financial planning choices (or no choices at all), which can negatively affect their assets and, therefore, ultimately, the likelihood of achieving their own life goals or not. That is, the first half of 2024 will end with two-speed financial markets; if the trend on the stock side is very positive, then the bond side is still affected, but it marks the return of the natural inverse correlation between the two markets that has been lost in recent years. In the first six months of 2024, driven by technology, the US S&P 500 rose by 15.13%, of which NVIDA alone rose by 150.7%, and the Nasdaq Composite rose by 20.09%. If the United States showed economic growth during the earnings season, Europe’s growth was minimal (less than 1%), but at least it did not fall.
Against this backdrop, European stock markets showed a two-sided trend in the first half of the year, with the optimism of the first half giving way to a more cautious mood in the second quarter. As a result, the main European stock exchanges all closed in the red in June, as did the second quarter, but the semester still ended in a clearly positive way, with the Eurostoxx50 recording +8.45%, Milan (+9.2%), Frankfurt (+8.8%), Madrid (+8.3%) and London (+5.6%), while Paris lagged further behind (-0.8%). As for Asian stock markets, Japan recorded +18.91% in the first half of the year, China +5.54%, India +10.43% and emerging markets +6.87%. However, the bond market continued to suffer losses, with US investment grade bonds at -0.71%, European bonds at -1.21%, global high yield bonds at +3.18% and emerging market bonds at +2.22%.
In June, the European Central Bank cut interest rates for the first time, lowering the three major eurozone benchmark interest rates by 25 basis points, while the Federal Reserve kept the federal funds rate unchanged. Both were heavily discounted by the market. The Bank of Japan kept interest rates stable, but announced the end of its years-long government bond purchase program.
The results of the European elections on June 8-9 showed gains for sovereignists in the key EU countries of France and Germany, which had an immediate impact on financial markets, which were concerned about the deregulation of public finances. The value of fixed income prices had a particularly significant impact on bonds issued by the French government, in favor of German government bonds, which are once again seen by the market as a safe haven asset. Of course, if Germany and France do poorly, Italy will not fare any better. The spread between Italian and German ten-year bonds has also widened this month.
On the last Friday of June, the Fed released core PCE (Personal Consumption Expenditures), which showed a slowdown in inflation in May, up 2.6% year-on-year on an annual basis. The 2.8% increase in April was in line with expectations and the lowest level since March 2021, which only paves the way for the long-awaited rate cut by the Fed. So far, the market is pricing in a rate cut with a probability of about 70%. Next September
In terms of currencies, the euro has fallen by 2.86% against the dollar in the first half of the year, the yen has fallen by -12.28% against the dollar and -9.84% against the euro. The yen-dollar exchange rate recorded -2.05% in June alone, and a new round of decline in the yen could increase import costs and thus push up inflation in the country of the “Rising Sun”, which is why the Bank of Japan (BoJ) sent monetary policy. This suggests that its quantitative tightening (QT) program in July may exceed market expectations and may even be accompanied by an interest rate hike.
Of course, the market has been experiencing a period of risk from November to today, with gradual irrational exuberance (positive expectations) that, like a snowball, gets bigger and bigger and has a distorting effect on the market (see meme stocks/GameStop), which we believe, however, may need to be mitigated by a correction, at least as long as corporate profits remain at these levels, against the backdrop of trend growth.
We believe that equities remain supported by a healthy economy and corporate profits, which remain strong with very few exceptions; The wild card that leads us to be cautious is essentially that positions remain very concentrated, which could create volatility in the event of exogenous events. We continue to favor US equities, European equities (financials, fashion and utilities) and Japanese markets. Among emerging markets, we are underweight China and favor India. In bonds, we prefer shorter-dated government bonds with gradually increasing duration to increase the portfolio’s responsiveness in the event of rate cuts. We recommend increasing the liquidity of the portfolio, aiming to capture subsequent opportunities in market declines.
On the currency side, we believe the Japanese Yen is undervalued compared to all other currencies. We believe that in a period of uncertainty like this, it is necessary to position based on volatility. We remain optimistic about the gradual positioning of the US curve steepening that is not covered by exchange rate risk.
Cristian Ceccoli – Managing Director, NT Capital SG SpA
Disclaimer
NT Capital SG SpA Sole Shareholder, Via Biagio Antonio Martelli, 1- 47891 Dogana (Republic of San Marino). This publication is issued by NT Capital SG. The information and opinions reported here do not constitute an offer to the public, nor do they constitute personalized advice, are not of a contractual nature, have not been prepared in accordance with legislative provisions and are not sufficient for making an investment decision. The information and data are believed to be correct, complete and accurate. However, NT Capital SG makes no representations or warranties, express or implied, as to the accuracy, completeness or correctness of the data and information and, if such data and information have been developed or derived by third parties, NT Capital SG assumes no responsibility for the accuracy, completeness, correctness or adequacy of such data and information, although it uses sources it considers reliable. Unless otherwise stated, the data, information and opinions are considered to be up to date as of the date of their preparation and are subject to change at any time without prior notice or subsequent communication. NT Capital SG may also decide, in its sole discretion, to operate in a manner that differs from the opinions expressed in this publication as NT Capital SG is not required to act in whole or in part on the opinions expressed in this publication in conducting its business.
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