Thin end of December trading exacerbated moves some of which have been retraced. As previously mentioned, it felt that markets had got a little ahead of themselves and we were due some retrenchment of what turned out to be a very strong end to 2023.
These moves must be viewed in the context of what is a very uncertain geopolitical and economic backdrop. The risk of Middle Eastern tensions stepping up to another level is real and it has been widely broadcast that over 40% of the world’s ‘democratic’ population face elections this year, not least the US and the UK.
Undemocratic societies have their own set of problems. China, following hard on the enormous defaults of its two biggest property companies, Evergrande and Country Garden, saw their property debt crisis take hold in their shadow banking sector. This is roughly $3 Trillion in size (the same size as the French economy) and so the filing of Zhonghzi for bankruptcy with $64 Billion of liabilities is relatively small but the risk of contagion is high (thankfully mostly contained onshore).
Members of the Federal Reserve did their best to push back against the most optimistic and exuberant forecasts of almost immediate cuts in rates. Acceptance of ‘higher for longer’ was replaced with fears of ‘too high for too long?’. Either way the US 10 year saw a move of over 100bp from near 5% to below 4%, a level not seen since July. As much as rates markets incorrectly discounted the speed and severity of the hiking cycle, they are likely to overestimate the timing and depth of the easing cycle. Commentators have sensibly reminded us of one rule that still holds as true as ever: Don’t Fight the Fed.
The ECB also has the unenviable task of trying to navigate their way through a potential recession that might already be upon them as their PMI’s remain below 50 for the seventh month in a row. German inflation popping up to 3.7% from 3.2% in December, France also seeing a rise from 3.5% to 3.7%, won’t be helping them.
The UK appears to have shaken off the stagflation label as we saw strong year end growth (PMI’s well above 50 and a November GDP print of 0.3%) but stagnation remains a risk. There was much navel gazing as the FTSE celebrated its 40th birthday but we do look to be in a healthier position than some of our near neighbours. The Bank has also attempted to push back against market expectations of 5 cuts this year.
The primary market exploded into life for sovereign and corporates. Very healthy demand for government paper is reassuring, the new UK 20 year issue was 3.6 times oversubscribed, even Italy’s 7 year issue was 7 times oversubscribed. In Sterling credit high grade issuers were busy accessing the market and yields on offer are still highly attractive with New Issue Premium (NIP) allowing for outperformance in the secondary market.
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