Inflection Point

This week was about a continuation of headlines arising from social media with regards to the Gulf war. We are still in the process and conflicting headlines are quoted from both parties, despite that we might be at an inflection point regarding the passage of ships from the Strait of Hormuz. Nothing can be for sure, but hopefully the rational option will prevail as this situation is mutually destructive for all parties involved.

The market continued with the bullish tone as news hit the tapes with the US and Iran being in the middle of agreeing a memorandum of understanding which will lead to the end of the war. We haven’t seen any concrete information yet that might lead to this conclusion, nevertheless the market is keeping an upbeat tone, especially on the equity side. US equities are trading anywhere between 1.75-3.5% with technology stocks outperforming. The semiconductor sector continues its parabolic move higher, gaining 45% in the last 1.5 months. Software has also caught a bid as it has underperformed the Nasdaq 100 index by 30% year to date. In Europe, the tone is slightly more conservative, posting gains of around 0.5-1%, as the Artificial Intelligence momentum is quite absent. Emerging markets have joined the rally with indices in Asia posting 2-5% moves higher, with South Korea and Japan outperforming. On the rates side, we are off by 10-15bps from the recent wide, nevertheless, we can feel the market is still not convinced that inflation is not going to be an issue due to higher oil prices. The market is still pricing 64bps of rate hikes by the ECB, which is around 20bps lower than levels seen last week. Peripheral spreads have compressed as a more positive market tone has brought in buyers in Italian and Greek debt.

On the credit side, we have seen quite a few new issues hitting the primary market with good demand as expected. It seems that this asset class is preferred by global mandates as the swap’s spread move has resulted in better entry levels for investors in terms of coupons. The sweet spot is the front to middle part of the curve with a lot of issuers coming in the 5-10yr duration bucket. We share this view as well as this optimizes our carry profile in many situations, and we have consistently added risk across our mandates. On the EURUSD side, we are still seeing a very tight range of trading as there are a few opposing forces which seem to keep the level around the 1.17-1.18 context. Commodities, away from oil, have posted 2.5-7% more with silver futures outperforming. A more optimistic tone in the market has resulted a drop of 7% lower in the crude oil market, but as we all have seen this year, this can easily change due to a potential headline.

Looking ahead…

We are still going through an earnings period with over 82% of the S&P companies beating expectations so far and 76% of them posting higher forward guidance, so it is key to see how this evolves later this month. President Trump and Xi are supposed to have a meeting in China next week, so all eyes on screen for any further news flow that might impact tariffs, trade and/or Gulf war. From the more short-term perspective, we wait to see US NFP figures this afternoon which will give us another data point of how the labor market is behaving.

Written by: Michael Konstantinou, Senior Portfolio Manager