Halfway mark!

Halfway mark!

We are almost done with the first 6 months of the year and what year, it has been! Geopolitical news has prevailed so far, and it seems we are not going to see the end of it going into the second half of the year. Quarter end is almost here with technical factors affecting the market price action.

But let’s have a look at what happened in the market in the last couple of weeks. First and foremost, the MoU has been signed by the governments of Iran and US. We have entered a period of 60 days of negotiations which will hopefully try and solve different critical matters such as nuclear issues. President Trump has already positioned himself around the possibility of extending the 60-day timeframe to resolve these important issues and the market, based on history, has taken a view that the talks will be ongoing. Nevertheless, the price of oil has now come back to pre-war levels wrapped around $70 in the front Brent crude oil contract. That has alleviated some inflation concerns with a relief rally on the 10yr part of the government bond curve, trading around 15-20bps off the wide and at 3-month lows. The market no longer fully prices a quarter point ECB hike for the rest of the year. Lagarde’s comments helped the dovish camp of the market to take a more bullish outlook going into year end, along with the opening of the Strait of Hormuz, which might indeed bring the market back to a more equilibrium place. Across the pond, FED chair took a more hawkish view towards rates with the market pricing 31.5bps of hike by year end (see below graph)

More importantly, the new regime of no forward guidance provided by the FED will create a more data dependent approach which will not be distorted by short lived events and miscalculated anchored expectations. There are two school of thoughts here, on one side market participants might expect a greater spike of volatility during FED meetings as the market will not be “prepared” for the outcome. On the other hand, given the noise arising from geopolitical news which might impact data on a more transitory basis, it is prudent to say that the FED should act based on data which can evolve in a very different manner across different time frames. In that respect a more educated, reactive function is needed to plan monetary policy, which in the long term will prove to alleviate market volatility.

Moving on, we are entering a more technical period as quarter end approaches. A lot of passive funds must manage the tracking error versus benchmarks and that creates a technical of selling the “outperformers” to buy the “underperformers”. By default, give index weights there is an “offer” in the market which might pressure equity levels lower. On a fundamental basis, nothing changes, it is just a quarter-end technical which prevails as the rebalancing takes place. In terms of earnings, we saw another strong beat by Micron, which has become one of the bellwether stocks of AI.

Month to date, we are seeing an under performance of technology which has impacted US indices. Both the S&P 500 and NASDAQ 100 are trading in the region of 2.5-4.5% lower, whereas value and small caps indices are trading 2-3% higher, month-to-date. The same picture prevails in Europe, with the catch-up trade playing through and equity indices trading 3-4% higher. Gold has extended its loss to 6.5% year to date as the dollar strength and FED hike expectations, have taken a toll on the asset’s performance. EURUSD is trading in the 1.13-1.15 context, again a by-product of FED hike expectations and a more dovish ECB rhetoric.

Looking ahead…

Going into next week, we should still see a volatile path to the market as quarter-end rebalancing takes place. It is a short week, with PMI and CPI data coming out of Europe. On Thursday, we have the US NFP which will be another important set of data which might impact the pricing of the rates curve. July, on a seasonal basis, tends to be a positive month in terms of total returns and given the under performance of the tech sector this month, we might get to see some catching up. The real catalyst for the continuation of this bullish move in the sector will only come through once the Q2 earnings cycle goes through. The market is pricing a 20% earnings growth for 2026 and 2027, a number which if it comes into fruition, will be reflected by higher nominal prices in the equity market.

Written by: Michael Konstantinou, Senior Portfolio Manager