Market overview
Last week, the equity market continued to show signs of strength with the S&P 500 recording a sixth consecutive week of gains, the longest streak since November 2019. This performance was underpinned by strong economic data, reinforcing the view that the US could avoid a recession. However, this economic strength has also led bond investors to reconsider their bets on rate cuts in 2024, driving yields higher. This complex context suggests a Federal Reserve that could hold rates higher for longer, reflecting a potential "Goldilocks" scenario of lower inflation without recession.
Actions and risk management
Last week, we readjusted our portfolio to capture the rise in the indices while maintaining a defensive position. We identified opportunities in the energy, consumer and technology sectors, while being more selective in our buy points. At present, finding opportunities without substantially increasing portfolio risk is becoming increasingly difficult. Our sector diversity and lower-than-index active risk make us resilient and less volatile to market downturns. Low index volatility also contributes to maintaining a lower-than-usual risk profile in our portfolio.
Bonds
In the bond segment, we remain patient, looking for an attractive entry point to deploy more capital in longer maturities. US 10-year bond yields are beginning to normalize, potentially offering interesting long-term opportunities.
Analysis and outlook
Recent developments suggest continued economic strength in the US, despite mixed signals on financial markets. We are maintaining a cautious and selective approach, while remaining alert to opportunities that may arise in this dynamic landscape.
At the beginning of the week, stock markets started on a cautious note, with traders avoiding big bets ahead of the release of key economic data and meetings of the major central banks. These events could test market optimism about rate cuts in 2024. The much-anticipated November CPI report will give an indication of the disinflation trend ahead of the US Federal Reserve's final decision for 2023.
US consumer expectations for short-term inflation fell in November, reaching the lowest level since April 2021. This development fuelled speculation that the Fed would have completed its rate hikes and would begin easing policy by mid-2024. Nevertheless, closer analysis reveals investor concerns, with volatility expected on equity markets in the days ahead.
According to many experts, even if this week's inflation report in the US shows encouraging signs, the US Federal Reserve will want to see several consecutive months of employment and inflation data before altering its current monetary policy parameters. Consequently, any market downturn in response to rates staying higher for longer than expected could be an opportunity to rebalance or buy on the downside.
What we're seeing this week
The week is marked by several significant global economic events that could influence the markets:
Tuesday :
- Publication of Japan's Producer Price Index (PPI).
- ZEW survey of economic expectations in Germany.
- UK unemployment data.
- U.S. Consumer Price Index (CPI), a key indicator for the Fed's monetary policy.
- Speech by Michele Bullock, Governor of the Reserve Bank of Australia, at the AusPayNet Summit in Sydney.
Wednesday :
- Euro zone industrial production.
- Producer Price Index (PPI) in the United States.
- Federal Reserve monetary policy meeting, followed by a press conference with Chairman Jerome Powell.
Thursday :
- Monetary policy meeting of the European Central Bank (ECB), followed by a press conference with President Christine Lagarde.
- Bank of England monetary policy meeting.
- Monetary policy meeting of the Swiss National Bank.
- US statistics on initial jobless claims, retail sales and business inventories.
Friday :
- Publication in China of the 1-year MLF rate, property prices, retail sales, industrial production and unemployment rate.
- Eurozone manufacturing and services PMI indicators by S&P Global.
- Industrial production, Empire manufacturing index and cross-border investment in the United States.
In conclusion, although the short-term outlook is uncertain with key economic data and monetary policy decisions still to come, the long-term outlook remains positive. We remain vigilant and ready to adjust our strategies according to market developments.
