“Shifting” narratives

“Shifting” narratives

A market narrative is usually what drives the price action across different asset classes. It seems to me that so far this year given the current state of volatility in the market due to political interference, market participants work in reverse. We look at price action and then we define a narrative which could potentially explain the trajectory of the market and as you can imagine these changes according to positioning and market conviction.

We came in this week with German election results in the front news as expected, which by default gave another boost to European stocks with DAX outperforming. The EUR and German government bonds had a very small reaction post results as this news were indeed embedded in the expectations of the market. Germany’s CDU/CSU bloc and the Social Democrats are set to start exploratory talks on a coalition to form a government; what lies ahead of course is the decision making with regards to abolishing the “debt break” which by default will imply more government bond issuance. As I have mentioned in my previous newsletter, I believe there is only one viable option for them, i.e. to abolish the minimum issuance level, as it is one of the ways to fund defense spending and provide fiscal stimulus. In terms of issuance, another busy week in Europe with circa EUR32bn government bond issues across different countries. Spain issued 7bn of a 15yr government bond with over EUR80bn of institutional demand, which was the highest ever on a non-10-year maturity bond.

Across the pond, President Trump continues its tariff rhetoric which initially prompted the market narrative to imply higher inflation, but as of now the same fact has “shifted” to a lower growth rhetoric. The winner of the week in terms of performance was the 10yr US Treasury government bond closing 11bps tighter. One point of note which I find interesting is the outperformance of US Treasury government bonds versus 10-year German government bonds. In the last month, the relationship has moved from 220bps to currently 186bps, which shows how the lower growth narrative has shifted from Europe to the US. (lower growth implies more rate cuts which by default means lower bond yields).

The move tighter in US Treasury yields was also exacerbated as on Tuesday, US Consumer Confidence came at 98.3 versus an expectation of 102.5, a downside surprise which fueled momentum to the US lower growth narrative. On the tariff side, President Trump keeps a consistent approach with regards to Mexico, Canada and China levies which are supposed to kick in on the 4th of March. Another very important event took place in the US with NVIDIA announcing 4th quarter results post-market hours on Wednesday. Results came in line, but the market questioned the forward prospective growth with the stock trading up to 7% lower on Thursday’ session. Given the high concentration risk across the Magnificent 7 firms, the stock market traded 2.25% lower in the week for S&P and 4.65% lower in NASDAQ. A point of note here is that the main US stock index is down on the year versus European counterparts which are anywhere between 7-15% higher year to date. (see below graph).

On a more positive note, it seems that Ukraine is close to a deal with the US with regards to earth minerals. There is a positive momentum along all 3 counterparts, US-Russia-Ukraine, to solve this never-ending issue, which hopefully imply a smoothening of the cross Atlantic relationships. President Trump reminded the Europeans that tariffs are imminent with a 25% levy on autos to start off. Now, is this a negotiation tactic which leads to more European defense buying from the US or is this going to result in a retaliation game which will push both trading powers even further away from each other. EUR USD has traded anchored to the 1.05 figure and in our view, it could be considered as a good hedge against any probable escalation of tariff wars.

Looking ahead…
Today, we await the CORE PCE Price index figures out of the US (preferred measure of inflation by the FED) which will pinpoint to the direction of deflation that the market is expecting. In the meantime, we had CPI figures from Germany and France which came at the lower end of expectations and provided a good bid on government bonds. One thing is for sure, that volatility will remain elevated as the political interference is causing exacerbated moves in the market. Active management along with a diversified range of assets is a winning recipe for us and that’s what we are trying to achieve within our Athlos Balanced Strategy AMC (Actively Managed Certificate). If you need any further information, please contact any member of the Athlos Capital team.

Note: The Athlos Balanced Strategy AMC is only suitable for Qualified Investors under EU Prospectus Regulation.

Written by: Michael Konstantinou, Senior Portfolio Manager