Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Head of Fixed Income Strategy
Summary: Geopolitical tensions and central banks' monetary policies remain at the forefront of market concerns. Fears of a possible war in Ukraine will compress long-term yields while lifting the short part of the yield curve as the market considers higher energy prices. Strong Eurozone PMI readings and an elevated US PCE Index might also contribute to advance rate hike expectations. Uncertainty in bond markets will undoubtedly remain elevated, contributing to volatility and a steady bear-flattening of the US and UK yield curve. In Europe, the focus will be on ECB official speeches and the possibility of early stimulus termination.
Even if the Fed does not want to cause a selloff voluntarily, it might be nearly impossible for it to avoid a tantrum. On the one hand, if it does not do enough to curb inflation, it could spark an inflation tantrum. On the other, if it is too aggressive, a taper tantrum might ensue.
This week, investors will need to focus on the Personal Consumption Expenditure Index released on Friday, which is expected to come out at 6%. An overshoot might revive more aggressive interest rate hikes expectations. Before Friday, the focus will be on the 2-year, 5-year. 7-year US Treasury auction starting tomorrow and on Federal Reserve speakers.
In Europe, the focus is on the PMI February data released this morning, which shows the recovery is underway after the winter lockdowns. It might encourage central banks to unwind pandemic stimulus faster than expected. Therefore, the focus will be on central bank officials and their speeches this week. In the UK, Bailey will speak in front of the Parliament's Treasury Committee to answer questions about the economy and inflation. In the eurozone, de Cos, Guindos, Schnabel, and Panetta speak throughout the week.
Although it's inevitable for the ECB to assume a less accommodative stance with the BOE and Federal Reserve hiking interest rate aggressively, we believe that the BTPS-Bund spread is a good indicator of how far the ECB can go. So far, the BTP-Bund spread remains below 200bps, leaving the central bank without preoccupations. However, as it widens above this level, we expect ECB officials to become more cautious.
Geopolitical tensions in Ukraine will also be a focus in the eurozone. Rising tensions could see energy prices soaring, contributing to even more aggressive monetary policies.
Monday, February the 21st
Tuesday, February the 22nd
Wednesday, February the 23rd
Thursday, February the 24th
Friday, February the 25th
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