“Think of it”

“Think of it” was the opening remark of President Trump in social media, implying that the Ukraine president has persuaded the US to provide him with more than $350bn of funding without anything in return against the current war with Russia. It is obvious from all the back and forth in the social media, that the relationship of President Trump and President Zelenskiy is not at its best, but these accords change continuously.

We came in this week with news that there will be a meeting in Saudi Arabia between the Russian and US counterparts to discuss the roadmap of how they will stop the war. Initially, President Zelenskiy was supposed to attend but then those plans changed. There was no involvement from any European counterparts, and this triggered a meeting of 7 leaders under Emanuel Macron’s initiative. In the meantime, the market, as we have pointed out a few times so far, makes assumptions of how the world political agenda will affect spending, rates and overall economic growth; a task which is hard to predict. On the back of more optimism around a war cease fire, European rates under performed with 10yr German government bonds moving 22bps wider from local tights (graph below). The reason behind the move is that there will be more issuance across European countries to fund increased defense spending, again something not as clear for me as there can be other avenues to source funding.

Global equities remained anchored with the European out performance taking a breather as we also head into German elections this weekend. The biggest out performer on that side, was Chinese equities with the FTSE China 50 up 2.05% on the week. The move was exacerbated given the strength we saw in the Chinese technology stocks with Alibaba results coming in better than expected and the stock souring 57.41% in the last month. On the European side, bank stocks remain the sweet spot finishing the week up 1.25%. A relative value point here is that if you compare the European Bank Index (SX7E Index) from 2005 onwards, it remains undervalued in contrast with US Bank Index (XLF US Equity) which have seen a new high this year (see below graph). This is a view which we had from the initiation of our Athlos Balanced Strategy AMC (ISIN: CH1402968643) with a decent weight as a % of our AUM in European Bank stocks and debt. (Note: Our Athlos Balanced Strategy AMC is suitable for Qualified Investors under EU Prospectus law).

The week came to an end with February PMI figures from France, Germany, UK and EU. All in all, the picture hasn’t changed with surprises on the downside especially on the services side. Eurozone Composite PMI came at 50.2 versus 50.5 expected, again showing that the growth trajectory remains muted on the continent. For the record, as of now the market is pricing 3 more cuts to 2% ECB deposit rate by year end.

Looking ahead…
This weekend, German elections are taking place with voter’ support for CDU/CSU political parties having a steady 30%-win rate and with the far-right ADF party coming second place with about 20% of the votes. The key here is a coalition in the parliament which will eventually allow for a loosening of restrictions on government borrowing – enshrined in the so-called constitution “debt-break”. If they go through the loosening, then that would imply more borrowing which will eventually be used either for expansionary policy or defense spending. There is no clarity about the extent and when this will take place, but the market has taken a view that this is highly expected. Any other result will cause in my view a retracement in the recent yield widening we have seen in German government bonds. Furthermore, next week we have GDP figures from Germany and the US for Q4 2024 along with US Core PCE Price Index data on Friday which is key to the market with regards to the narrative around inflation.

Written by: Michael Konstantinou, Senior Portfolio Manager