A summer of reality checks on market expectations

Market moves over the summer have served as a reminder that, at a time of high valuations, any mismatch on corporate earnings or monetary policy expectations and any scare on growth could be triggers for sudden falls. While most major markets have recovered from the volatility seen in early August owing to the Fed put, we cannot ignore the fact that some segments are still priced for perfection...

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Vincent Mortier

Vincent Mortier

Group CIO

When central banks are cutting rates and risks of a US recession are limited, we remain disciplined and mildly positive on risk assets.

Vincent Mortier, Group CIO

Recalibrate risks as markets sail choppy waters

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Recalibrate risks as markets sail choppy waters

Markets are shifting their focus to economic growth, as inflation continues to decline. The primary reason for this shift seems to be weakening consumption, which is now extending to wider sections of the economy. In the EZ, a multi-speed recovery with divergences across countries is the main theme. In addition, fiscal policies could be a drag on growth in the medium term. Collectively, these factors call for a more prudent stance, and a tactical, incremental risk reduction rather than a structural de-risking.

Flexibility in duration is crucial at this stage

Reaffirmations of the Fed put by Chair Jerome Powell primarily due to continued progress on inflation have shifted the market’s focus towards labour markets and economic growth. While we are seeing signs of slowing labour markets that would encourage the Fed to cut rates, a lot of that monetary easing is already priced into the markets. In Europe, the story is similar with respect to inflation falling, but some components such as services are sticky. As a result, the extent of central bank easing would actually depend on the macro data.

Flexibility in duration is crucial at this stage

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Play market anomalies led by fundamentals

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Play market anomalies led by fundamentals

The August turmoil that began after negative surprises on earnings of some US tech companies was later exacerbated by weak macro data. We have been saying for quite some time that there is ambiguity about whether companies can quickly translate their AI-related investments into a sustainable growth in earnings. Now, the markets seem to be questioning that as well, as valuations in select corners are still a concern, along with weak macro dynamics. Even in the EZ, where the economic recovery is moving up towards its potential, the path is vulnerable and dependent on exports.

Hot Takes From Us

How do you see central bank policies evolving this year?
What’s your view on the US economy and labour markets?
Do you think gold prices can maintain the upward trajectory seen so far this year?

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