The Last Mile

The Last Mile

We are heading to the final sector of the race as we are almost done and dusted with Q3, heading in Q4 with no signs of changing rhetoric in terms of elevated market volatility.

All in all, so far, it seems that fundamentals always seem to coincide with market price action but given the elevated amount of noise and unexpected events we have seen so far, someone might argue that the markets have behaved in a good manner. During August, we saw a lot of different pieces of news which have coincided with as it seems a bullish narrative in the equity markets. First and foremost, President Trump invited Vladimir Putin in Alaska for a closed-door meeting to kick start a potential roadmap to a solution plan regarding the Russian – Ukraine war. There are mixed feelings with regards to the success of this meeting as China and Russia along with India seem to be pacing on a road of consolidation and increased trading partnership. On the other hand, the intention across all parties is to create the necessary conditions for a trilateral meeting between Trump-Putin and Zelenskiy along formalizing external safety guarantees to Ukraine form both sides of the pond.

Moving on to FED news, Chairman Jerome Powell delivered a dovish speech to the Jackson Hole symposium which ignited a rally both in the rates and equity market. Currently as it stands, the 17^{th of} September FED meeting is “live” with 25bps cut penciled in.  By year end, the market is pricing 61bps of cuts. (see table below)

There is a lot of background story behind the forces pushing the FED towards the first cut. To be fair, the data has shown that inflation has behaved well given the tariff potential drawback but more importantly different sets of US data is pointing towards a cooling labor market. Let me remind you that the FED has a dual mandate; bring inflation to the 2% target level and provide economic conditions for a stable labor market. President Trump has fired Governor Cook and has started a legal battle to overthrow her from the voting FED committee. Moreover, the Chair of the White House Council of Economic Advisers, Stephen Miran, has been nominated to join the FED Board. All these new facts have intrigued a controversy regarding the FED’s independence. There are a few schools of thoughts around the matter, so far, the market is “hedging” this risk by buying Gold, which currently trades at $3550 per ounce.

In Europe, elevated sovereign bond supply coincided with steeper rates curves. Long end bonds have suffered most of the drawbacks here with some levels touching the 1990s wide. In terms of seasonal factors, September tends to be a weak month in terms of returns in both equity and rates markets, nevertheless this year has been nothing like a normal year, hence we take this historical statistic with a pinch of salt. So far month to date, US stocks are up in the range 1-1.5% with European stocks unchanged. EURUSD has stabilized in the 1.16-1.17 context as it seems for now it is a very crowded position in terms of long exposure.

Looking ahead…

At the time of writing this newsletter we are waiting for US Non-Farm Payrolls and Unemployment data. The market is expecting a 75k print with a 4.3% unemployment rate. Today’s data is important not so much for the September meeting outcome but mostly for the forward path of FED’s monetary policy. Moreover, it will provide a solid indication in terms of the state of the labor market and where this is heading into year end.

Written by: Michael Konstantinou, Senior Portfolio Manager