February confirmed itself as a very positive month for i financial markets with generous stock performances equal to 5% in America, 7.5% in Europe and 10% in Japan, supported by strong fundamentals, especially in the United States, and good corporate results, particularly of companies in the tech sector.
Positive stock performance in the USA, Europe and Japan
He writes it Andrea Delitala, Head of Investment Advisory of Pictet Asset Management in a long analysis in which he underlines that “bonds have undergone a correction for the same macroeconomic reasons and for the consequent wait-and-see rhetoric of central bankers without however infecting the risky asset classes, as had instead happened in fall. The two-year returns of Treasury, for example, they rose by about half a point and 35 basis points on the 10-year. Movements which, however, largely returned in the first weeks of March”.
The composure of the markets – continues the expert – is also due to the following reading of the new information on the cycle and monetary policy: on the one hand, the strength of the economy is considered partly temporary, given that some support factors will run out over the course of of the next few months; on the other, let it be the Fed and the ECB they have in fact confirmed their willingness to inaugurate the downward cycle of rates, even if they have asked for more time to begin it, subordinating it to a greater conviction in the disinflation process. This is somehow traced back to a greater stabilization of wages and, therefore, of the labor market which now seems to be underway. As for Europe, we will also likely see a stabilization of profits.
Central Banks, “Wait and See”
As for the worst fears of stagflation, 2022 style, “they seem distant and the market currently seems purely focused on recalibrating the timing of interest rate cuts. To date, three cuts are priced for 2024 in the United States, in line with what was declared by the Federal Reserve in December, while four for the ECB. In line with market expectations, we also expect the first cut in June basically from both major central banks. However, there is a risk that the Fed lower your forecasts to just two cuts at the next meeting on March 20. A question that is not easy to interpret will be defining the terminal arrival point, an element that requires understanding what economic, technological and geopolitical scenario will take shape after the dust of this post-pandemic economic cycle settles. There are now fewer and fewer doubts about the fact that we are overcoming the critical phase and there are few in the market who still doubt the disinflationary process. Most now embrace the scenario of soft landing. The remaining doubts mainly concern the equilibrium point of real and nominal interest rates in the long run”.
At the landing point, the so-called neutral rate, “There is a certain nervousness in the debate within central banks and among economists. On the one hand, the great push of technological innovation on productivity could lead to a higher value of long-term interest rates; the latter would stand in real terms, i.e. adjusted for expected inflation, at a value of around one percent, rather than 0.5% in America and something above zero in Europe. The most recent estimates, published in recent days by the Fed and other research centers, confirm these levels if not even a little higher. On the other hand, some, including Isabel Schnabel, they observe how Europe is one step behind in adopting measures efficiency of its production structure and this aspect, together with other factors, could translate into a brake on potential growth and, perhaps, also into a greater persistence of inflation, certainly in a more antagonistic trade-off between profit margins and unit costs of Work. These doubts about long-term balances and rates justify the current historically high volatility in long-term rates”
What can we expect in the next few weeks?
In the best case scenario – continues Delitala – a trading range in bonds or further small drops in yields, towards 4% in the American tenth anniversary ei2.25% in the German Bund, if the inflation data confirm the downward trend. In this case stock performance could see some sector rotation from technology to the rest of the indices and perhaps even to healthcare. In one scenario less auspicious a slightly more pronounced correction of the stock indices cannot be ruled out which, after all, come from many weeks of recovery: from the October lows, in fact, the recovery of the stock markets of developed countries ranges from 20% in Europe to 30% in Japan. While only 12% was recorded in emerging markets. But, in this case, bonds should be able to offer some protection to the portfolio, as should the dollar after its recent weakening near 1.10.
The possible scenarios
In general, “the correlations between the two main financial activities, stocks and bonds, show signs of improvement, i.e. a more contrasting daily trend, contributing to the stabilization of a multi-asset portfolio. This certainly represents an encouraging sign, but to be able to count on full normalization, in our opinion, it will be necessary to leave this particular economic cycle behind once and for all. In the end, Bitcoin and gold, protagonists in February and March respectively, represent in our opinion slightly worrying signs that there may be some excess euphoria in the market. In any case, the performance prospects in the medium term and for the current year remain promising, with returns expected between 5% and 10% for balanced strategies”.
The information, opinions and estimates contained in the document – it is underlined – “reflect an opinion expressed at the original date of publication and are subject to risks and uncertainties which could cause actual results to differ materially from those presented here.”
