Loading summary
Transcript43 lines
- [00:02]
A
Good morning and welcome to Julius Baer's Moving Markets podcast. I'm your host, Roman Canciani. Today is Wednesday the 20th of May. We'll begin, as always, with our market update, reviewing the key developments from the past 24 hours. I'm joined by Jan Bob from our product and investment content team, who will bring us up to speed on the latest market moves. After that, I'm pleased to welcome Dario Messi, head of Fixed income Research. For our regular Wednesday discussion, we'll take a closer look at the latest video twists and turns in fixed income markets and what they mean for our strategy. Finally, I'll be speaking with Matthieu Rachater, head of our equity strategy research team, and we will talk about his takeaways from the earnings season and what this means for our equity strategy. But first, let's start with a roundup of the latest developments in global financial markets.
- [00:54]
B
Good morning, Jan. Good morning, Roman.
- [00:56]
A
Well, so let's start with the overall market mood, which has clearly turned more cautious. What stood out most to you in the past 24 hours?
- [01:05]
B
Yeah, you're right. It really felt like a shift in tone. The enthusiasm that carried equities higher, especially in tech, has started to wobble. Tech stocks led the declines, but the weakness really was broad based. The Nasdaq fell 0.8% while the S&P 500 slipped 0.7%. It's not dramatic, but it's a clear sign that investors are reassessing.
- [01:28]
A
Yes, and the weakest wasn't just confined to the us, right?
- [01:31]
B
No, it echoed across Asia. Also overnight, Japan's Nikkei and South Korea's kospi are down 1.3%. Chinese markets are also negative, but more modestly.
- [01:43]
A
And Europe though, seemed to tell a slightly different story yesterday, right?
- [01:48]
B
Yeah, for a change. Europe was more mixed, but overall held up relatively well. The pan European Stoxx 600 edged higher, about 0.2%. Germany stocks did even better, gaining 0.4%. And in Switzerland, the SMI stood out with a 1% rise, supported by strong performances in healthcare and financial stocks.
- [02:10]
A
Defence stocks came under pressure over the last couple of months, but yesterday was a strong one for that segment. What drove that rally?
- [02:18]
B
That's right. Defence names got a boost after reports that Sweden plans to purchase Navy frigates from France. This would represent Sweden's biggest military investment in decades. Saab, the Swedish defense company, is expected to also play a key role here. Its shares jumped more than 4% and the broader aerospace and defense sector rose around 2%. It's another reminder Roman that geopolitical developments continue to shape certain sectors and segments of the market quite strongly.
- [02:52]
A
So let's turn to what has arguably been the main driver behind the recent market moves. Bond yields. What's happening there?
- [03:00]
B
Yes, this was really the major story yesterday. Long dated US treasury yields have surged with the 30 year climbing to around 5.2%. That's a level we haven't seen since 2007, just before the global financial crisis. The move has been driven by renewed inflation concerns. A series of economic reports last week suggested that price pressures may be accelerating. By the way, inflation data out of Europe this morning shows that it's also an issue in Europe. Germany and UK producer prices rose more than expected in April, although consumer prices in the UK show signs of improvement, falling below 3% year on year. But you see still above the central Bank's target rate of 2%. And that means traders are increasingly pricing in the possibility that central banks might have to tighten policy again this year. The chance of a Fed rate hike in 2026 is now priced at 81%. And a survey of global fund managers yesterday showed concerns that the Fed might lag behind inflation. And if that happens, long term yields could rise even further. Many investors expect in this case the 30 year treasury yield to reach as high as 6%, which would be a
- [04:19]
A
level we haven't seen since March 2000. I'm looking forward to hearing Darius thoughts on that in a minute. We also saw an impact on commodities, particularly gold, right?
- [04:29]
B
Yes, gold came under pressure, falling about 1 1/2% to below $4,500 per ounce. Rising yields typically weaken gold because the metal doesn't offer any income. So it becomes less attractive when interest bearing assets are paying more on that. What we've seen yesterday.
- [04:48]
A
And oil interestingly moved lower as well despite ongoing geopolitical tensions.
- [04:53]
B
That's right. Oil prices slipped amid discussions within NATO about potentially helping secure shipping routes through the Strait of Hormuz if the waterway isn't fully reopened by early July. While nothing is final yet, the mere possibility seems to have eased some supply concerns.
- [05:13]
A
Finally, what are markets focusing on next?
- [05:16]
B
Yeah, the big event today is Nvidia's earnings, which are due after today's US closing bell. Given that the company has contributed about 20% of the S&P 500 returns this year, this is a major test for the AI trade and markets overall. And as if markets haven't been volatile enough, earnings today could swing shares of the world's most valuable company by US$350 billion in either direction based on option pricing. Investors will also be watching the minutes from the Fed's latest policy meeting for any clues on the future path of interest rates. And of course, geopolitics remain a major focus. The ceasefire holds for now, but it remains a fragile one. And that's all from me this morning.
- [06:08]
A
Thank you very much Jan for this overview.
- [06:10]
B
Thanks for having me.
- [06:14]
A
Right, and with that over to you. Dario, good morning.
- [06:17]
B
Hello.
- [06:17]
C
Good morning, Roman.
- [06:18]
A
Well, last week and also during the first few days this week, there was again quite some pressure on bond markets. Jan elaborated on that.
- [06:26]
C
Yeah, indeed. I mean bond yields are edging higher in some parts. They're even posting some multi year highs and it's really kind of a cross jurisdiction, maybe with the exception of China, but otherwise really broad based. I mentioned it also on the very long end. But even if you look at 10 year U.S. treasury yields, they're above 4.6% now and remember this yield edged below 4% just end of February. And even more pronounced are the moves in Europe or also Japan. Now one thing that I would really want to emphasize here, yes, there is upward pressure on yields or in that sense downward pressure on bond prices, but the magnitude is not near the recalibration that we had in 2022. So it's still a relatively narrow range when we zoom out, even if the level is definitely much higher.
- [07:20]
A
So what is it driving then? Inflation fears?
- [07:23]
C
Well, headlines would definitely suggest inflation fears. Jan was just mentioning it before. If I look at various signals or the yield decompositions, I see that's actually not really kind of the primary driver, at least not the direct one. So inflation expectations for the very near term and that are basically priced in markets and they went up. That's obvious when you look at medium term, we don't see big shifts there actually. So in fact it's much more the expected central bank reaction to any inflation pickup. So in other words, it's real yields that are moving here and not inflation expectations part which are in the yields.
- [08:06]
A
And are you concerned when will this stop?
- [08:10]
C
Well, I will not be able to tell you when this will stop. We talk about financial markets in my opinion, even if sometimes a bit momentum driven. They are smart are financial markets and they have a reason to do what they're doing. Still, I'm not very concerned, at least from a bond market perspective at the moment. And it's exactly what I mentioned before. So the nature of the move, that it's not coming from a de anchoring inflation expectations. If this would have been the case, I would be much more concerned, but I don't see any kind of signs about such a move. I'm just not seeing this. So remember we still see some easing in oil prices going into mid year. This should really take also away some pressure here and if not, then really it's real yields going up, so the real cost of money is going up. And if you think about this together with the shift in oil prices at some points, this will hurt growth more pronounced. So even if we don't see our base case playing out, I think this should also stop the pressure on high quality bonds at some point.
- [09:16]
A
Thanks a lot Dario for this comprehensive update.
- [09:18]
C
Thank you Roman for inviting me.
- [09:23]
A
And now it's your turn. Matthieu. Thanks for your patience. Good morning.
- [09:27]
D
Good morning Roman.
- [09:28]
A
So your team published a mid year outlook earlier this week after a very eventful first half of the year. What's the main message for investors heading into H2?
- [09:39]
D
So the overall message remains constructive for equities, but leadership within the market has clearly shifted over the course of the year. So until late February, non US equities were outperforming quite meaningfully, supported by lower valuations, improving earnings revisions, and also expectations that growth would broaden out beyond the narrow group of US make cap tech stocks. But the Iran war changed that dynamic. Higher energy prices hit Europe and parts of Asia harder given their higher dependence on energy imports, while the US economy proved more resilient thanks to its relative energy independence. At the same time, this really remains an earnings driven market and the Q1 earnings season showed that the US is still the clear powerhouse in that regard. So even though earnings in Europe and other regions have held up relatively well despite all this geopolitical uncertainty, The S&P 500 delivered roughly 27% year over year earnings growth in the first quarter Q1, which is exceptionally strong, and investors therefore rotated back into US equities, particularly AI related segments such as semiconductors and other beneficiaries of the infrastructure buildout. So going into the second half of this year we continue to favor a more balanced allocation between the US and international equity markets. So we still like the unique AI exposure the US market is offering. But outside the US we also continue to see attractive opportunities as valuations remain compelling and also earnings momentum continues to gradually broaden out.
- [11:07]
A
Right. So let's stay with positioning for now. Were there any important rating changes or shifts in strategy that stood out in this latest outlook?
- [11:16]
D
Yes, so both at the sector and region level. So on the sector side we upgraded communications back to overrate so the sector offers an attractive mix between structured growth and defensive characteristics. So the Internet and digital advertising platforms continue to benefit from the AI investment cycle and are increasingly showing clear signs of monetization with improving revenue growth and also earnings momentum. At the same time, the telecom operators continue to offer stable cash flow, resilient earnings and also attractive shareholder returns. Then within Europe, we also shifted further towards investment beneficiaries and away from the market more exposed to weak consumer demand. So we upgraded Spain and Italy to overweight, mainly because both markets have strong exposure to banks and utilities. So banks continue to benefit from resilient credit trends, improving loan growth and also strong shareholder returns, while utilities are increasingly leveraged to electrification and other AI related infrastructure spending. At the same time, we downgraded Germany to neutral and France to underweight. So in Germany, enthusiasm around fiscal stimulus has faded somewhat given all this geopolitical uncertainty and also slower implementation than many have expected. And then also France remains more exposed to weak consumer trends and also some political uncertainty.
- [12:37]
A
One topic that suddenly moved back to the center of attention this week is bond yields, and we just heard Dario's views on that. How much of a risk is the recent rise in yields for equity markets from here?
- [12:49]
D
So it's definitely something investors are watching very closely. So the sharp rise in long term bond yields has been one of the main reasons behind the recent weakness in equity markets. Higher energy prices are pushing inflation expectations higher again, as Tari has explained. And equity markets are starting to price into risk that inflation could remain elevated for longer. So you know, if you think about it, so far this year, most of the gains in equity markets have been driven by earnings growth rather than expanding valuations. But if bond yields continue to move higher, that could increasingly pressure valuations, especially in longer duration growth segments. So we have also seen the correlation between yields and equities turning negative again recently, meaning high yields are no longer being seen as purely growth positive here. And importantly, it's not only the direction of yields that matters, but also the speed of the move. So, historically, sharp increase in yields over a short period of time tend to go along with weaker equity returns because equity markets struggle to absorb such rapid adjustment in the discount rates. So the bottom line here is, if disruption energy markets continue into the second half of this year and inflation expectations move higher again, rising yields could become a meaningful speed bump for equity markets going forward.
- [14:07]
A
Right, thank you very much, Matthieu, for sharing your views here with us.
- [14:12]
D
Thanks for having me, Roman. Always a pleasure.
- [14:14]
A
And that's all for today, so my thanks to our speakers this morning, and thank you for tuning in. If you enjoyed today's episode and haven't yet subscribed, don't forget to do so, and please consider leaving us a review on your preferred podcast platform. Do join us again tomorrow Thursday, when Mike Rouber will be your host and he'll be speaking with more colleagues about what's moving markets. Until then, have a great day and goodbye for now.
- [14:48]
E
The information and opinions expressed in this podcast constitute marketing material and are not the result of of independent financial or investment research. Please refer to www.juliusbear.com legal podcasts for further other important legal information.