“New Sheriff in Town”

“New Sheriff in Town”
 

It is long now that the market has been expecting President Trump to announce his new FED Chair. As per recent news reports, the Trump administration is preparing for the president to nominate Kevin Warsh to be the next Federal Reserve chair as early as Friday morning. At the time of writing this report, risk assets are taking a bit of a breather despite an overall strong week in terms of performance.

But let’s review what happened earlier in the week. We have seen a lot of important geopolitical news out of the US which unraveled a strong reaction in the commodity market with Silver and Gold portraying quite a volatile price action. President Trump warned Iran to make a nuclear deal with the US or potentially face military strikes, increasing pressure on the regime and causing oil price to spike. Iran has pointed out multiple times that they are ready to have a dialogue but at the same time they are ready to respond in warfare if needed. We hope that calm minds will prevail and avoid any escalation perspective in the Middle East.

Moreover, we saw the FED committee keeping rates on hold with a more “wait to see mode” in terms of further rate cuts. The reality is that the market will wait to see who is going to see the new FED chair and the narrative that they will choose to portray. We also need to bear in mind that forward data is key and that narratives can easily change as we have seen in the last 2 years. As of today, the market expects 48bps of further rate cuts for this year (see below table)

Moving on to earnings, more than 75% of S&P companies reporting so far have beaten analyst estimates and it is quite clear that there is a broadening of better-than-expected results across other industries. This week we saw 4 of the MAG 7 announcing results with overall strong forward outlooks. There is more scope for the market to react on further capital expenditure into AI which may lead to significant forward earnings potential. One thing which is obvious so far is that the market hasn’t yet decided what should be the right ratio between forward profits and capital expenditure and it is quite easy to penalize for now of any uncertainty.

In terms of price moves, we are finishing the week with a mixed bag of results across equity markets. Some de-risking is taking place across the board as more commodity volatility is causing uneasiness in the market. At the time of writing this report, Gold and Silver prices are down 7 and 17% respectively on the day finishing the week with a downtrend vibe. On the equity side, there is a mixed vibe with some profit taking on the technology side ending up the week 1% lower. European equity indices remain more stable with value stocks in demand post the latest round of earnings. EURUSD traded just above 1.20 but stabilized for now in the 1.185/1.195 context.

Looking ahead…
We are all waiting for the Trump administration to finalize the new FED chair which removes a big uncertainty in the market. Moreover, any short-term escalation in the Middle East will cause risk assets to sell off with haven assets to come back into demand. If we zoom out from the tail risk short events, we do still see value in the market as the fundamental perspective still seems to be on the right track. It will be a long a year full of opportunities and through active management, we remain committed in providing optimal risk adjusted returns.

Written by: Michael Konstantinou, Senior Portfolio Manager