The pivot from the pivot
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
THE WEEK IN REVIEW
Fading prospects for near-term US rate cuts and heightened tensions in the Middle East were factors in the rise in volatility gauges last week. But perhaps the most striking feature was the sell-off in some prominent mega-cap tech stocks ahead of Q1 reports this week. The S&P 500’s 3% I drop over the week (in USD) was outstripped by the 5.5% fall in the Nasdaq ii. As in the previous week, greater confidence that rate cuts are coming in June and lesser reliance on tech meant that the Stoxx Europe 600 ii limited its loss to 1.1% (in euros). But the continued rise in the USD shook EM indexes and the strong recent rally in Japanese equities was brought to a halt. Government bond yields rose—more so in Europe than the US. Corporate bonds had a hard time, with spreads widening on US noninvestment-grade bonds. The Japanese yen wilted further against the US dollar, as did other Asian currencies, raising the chance of official intervention. Oil prices fell as markets played down the risk of Middle East escalation, while gold again defied the rise in Treasury yields to produce a positive return.
QUOTE OF THE WEEK
“The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence,” Fed Chair Jay Powell, referencing inflation, said on Tuesday.
KEY DATA
Retail sales in the US rose by 0.7% in March, down from a revised figure of 0.9% in February, but still higher than expected. US retail spending has increased in seven of the past 10 months.
In the UK, wage growth was higher than expected in the three months to February and unemployment rose, making the Bank of England’s job harder.
According to official figures, Chinese GDP rose at an annual rate of 5.3% in Q1, higher than expected, with industrial production up 6.1%. Retail sales rose at an annual 4.7% in Q1 and fixed-asset investment by 4.5%. But property investment fell at an annual rate of 9.5% in Q1.
MARKET VIEW
With the Fed’s pivot to a high-for-longer stance, away from its previous pivot to an easier posture, a policy divergence looms between leading central banks – fuel for volatility in foreign exchange and fixed income markets.
This week, data on core PCE, the Fed’s preferred inflation measure, will be key for gauging the timing and pace of Fed cuts. PMI data in developed markets will show whether a manufacturing recovery is materialising.
Weak outlooks from some tech companies last week compounded a sell- off in mega caps, putting the onus on big names reporting this week to revise up guidance if equity markets are to advance, as valuations are high.
On the geopolitical front, Iran and Israel appear to be looking for a de- escalation of tensions. However, a positive correlation between gold, oil, and copper is unusual and means markets are sending conflicting messages, pointing to uncertainty and volatility ahead. We are overweight gold. The US House of Representatives passed a USD95 bn aid package for Ukraine, Israel and Taiwan. In India, voting has begun in elections in a process due to last until end-April.
