Slightly lower US Dec CPI led to lower US bond yields; US Banks Q4 earnings kicked-off very well (EU Luxury stocks too)
WEEKLY TRENDS
WEEKLY TRENDS
- The December US CPI released lower inflation than prior and than expected, the UST 10yr failed to test the 5% mark and scooped down to 4.65% for now
- US SMEs together with EU stocks were the most performing stock indices last week, Europe was helped by strong earnings from Swiss luxury firm Richemont that pushed other French luxury stocks up
- US banks started the US kick-off earnings season very well, more to be released this coming week
- Trump takes power on Monday, Davos gathering starts on the very same day (20-24 Jan) and BoJ should announce a rate hike this coming Friday (24 Jan). Trump’s government first actions will be closely watched by investors, especially in terms of refinancing the humongous US debts (specific attention to new US bond issues yields this quarter), reducing government spending, with actions taken on tariffs and on cryptos
MARKETS
Equities
US Q4 earnings released (weekly stock performance):
JPM (+8%), Wells Fargo (+11%), GS (+12%), BlackRock (+6%), Citzens(+10%), Citi (+13%), BoNY (+10%), BofA (+3%), MS (+12%), StateSt. (+5%)
EU:
Richemont (+17%) also note LVMH (+7%), Hermès and Kering (+6%)
M&A :
Swiss SGS is to merge with French Bureau Veritas; Barclays secured 16% of Commerzbank; Intel (+13%) targeted by ARM and Qualcomm
Analysts:
Richemont (DB ’buy’ target CHF 175); Airbus (BNP and MS ‘overweight o/w’ target EUR 200); Dassault Aviation (BNP and MS ‘o/w’ target EUR 252 / 225); Thales (BNP and MS ‘o/w’ target EUR 176 / 161); Partners group (Citi and GS ‘buy’ target CHF 1450)
Rates
US curve (2-10 years) steepening decreased by 5bps to 35bps. Bond yields increased across the board, HY corporate spread slightly lower
Commodities
Oil price up, due to the cold wave in the US (-30 Celsius due on Monday) IEA increased its 2025 demand forecast so did OPEC
US
Dec CPI (+2.9%, Core +3.2% vs 3.3% prior), Dec PPI (+3.3% vs 3.0 prior)
Cryptos
XRP (+40%) on SEC’s lawsuit likely to be abandoned ; DOGE (+23%) Elon Musk favorite memecoin
Under the watch
LA wildfires impact on insurance and power companies bond ratings
Nota Bene
Basle III RWAs +10% for EU banks (US banks not yet impacted)
BP to cut 5% of its staff; Citi provisioned $600m for job cuts severance
CALENDAR
Monetary Policy releases: JP Bank of Japan (24 Jan) likely to raise rates by 25bps
Q4 Corporate earnings: US Netflix, Charles Schwab (21), P&G, J&J, Abbott lab (22), TI (23), Amex, Verizon (24); EU: Ericsson (24)
Markets Holidays: US Martin Luther King Day (20 Jan)
WHAT ANALYSTS SAY
Rothschild & Co Asset management, 17 Jan 2025
Authors: Yoann Ignatiew, Head of International Equities; Anthony Bailly, Head of European Equities; Emmanuel Petit, Head of Fixed Income
· International Equities
We are approaching 2025 with a resolutely cautious stance, with no intention of position, with no intention of significantly re-exposing ourselves to risk in the current environment. The repercussions of the past global election year, combined with a second term for Donald Trump in the United States are amplifying the uncertainties surrounding inflation, growth and trade. At the same time, investors are having to navigate an environment with a new geopolitical reality, changes in supply chains and the meteoric rise of artificial intelligence.
Against this backdrop, we remain convinced that opportunities remain. In the US, the equity market remains attractive thanks to solid economic growth, robust earnings and strong innovation. Although flows remain concentrated in the ‘Magnificent 7’ , there are other opportunities, particularly in banking stocks, which should benefit from promised deregulation.
In terms of corporate results, expectations of extremely strong earnings growth of around 15% are worth watching. A disappointment could lead to a major sell-off.
In Europe, despite the drag from energy, political instability and low productivity, there are opportunities in the healthcare, industrial and luxury sectors, driven by globally competitive companies.
On a global scale. It is difficult to see the emerging countries as a homogeneous block, given the wide variety of economic characteristics. Nevertheless, on the whole, growth has shown notable resilience, and inflation has fallen sharply from the peaks reached in 2022. In China, despite major stimulus measures the Party is struggling to boost domestic demand. The November's announcements of monetary easing were disappointing, but the government still has room for manoeuvre to increase the deficit. Donald Trump's re-election and the threat of new tariffs could accentuate this pressure, forcing Beijing to prioritise domestic consumption in the face of a tougher export environment.
We remain committed to being exposed to local consumption in China and, more generally, in Asia and Latin America.
In conclusion, our scenario is one of an uncertain environment, in which the challenges of geopolitics, inflation and growth coexist with opportunities, particularly in specific sectors, sometimes neglected sectors and resilient regional markets.
Finally, while inflation is already proving to be more resilient in the United States than in Europe, the inflationary nature of Donald Trump's programme leads us to believe that the Fed could maintain the rather hawkish tone displayed at its December meeting.
On the other hand the situation looks very different in Europe, where inflation continues to fall, offering the ECB more room for manoeuvre. A further fall in interest rates could support lending, revitalise economic activity and ultimately benefit equity markets.
·Fixed Income
We expect the economies and monetary policies on both sides of the Atlantic to be out of sync. Together with monetary policies on both sides of the Atlantic in 2025.
The central banks seem to be staying on course and yield curves are continuing to steepen, increasing the risk to longer rates.
Based on market expectations, with four rate cuts currently envisaged, the European trend has aligned with the US trend. The ECB's terminal rate could therefore be above 2%. However, it is likely that the ECB be forced to adopt a more sustained pace, as growth remains its main concern, while political uncertainties continue to weigh, as do the new US president's protectionist impulses.
In the United States in particular, it seems hard to envisage the Fed to make any further rate cuts, not least because of the inflationary risks associated with the future US administration's programme.
So far, the central bank has managed to bring inflation closer to the target without triggering a recession, making the quasi-idyllic ‘Immaculate Disinflation’ scenario a reality. It seems likely that the neutral rate could now be higher than previously envisaged. The market will be closely scrutinised, as will the impact of the measures promised by candidate Trump. It cannot be ruled out that the US central bank may have to raise interest rates during 2025.
This new year should nevertheless be a continuation of 2024, with a gradual steepening of the yield curves. Agility will be key, as opportunities could arise from events and decisions with contradictory effects in different zones.
To sum up, the credit market's resilience will depend on monetary policies within the macroeconomic environment. In this context, the flexibility displayed by the Fed contrasts with the apparent rigidity of the ECB's timetable. However, given current fundamentals, the asset class continues to enjoy attractiveness.
We remain attentive to the cyclicality of our positions and to credit quality in general. While the valuations of some segments may appear high, we believe they are justified in terms of fundamentals and as long as the macroeconomic environment does not deteriorate.
· Black Swans
Equities
In 2025, a number of key factors could influence the markets. These include the divergence in monetary policies between the Fed and the ECB. The Fed could maintain high rates to contain inflation stimulated by Donald Trump's expansionary policies, while the ECB is likely to adopt a more accommodative stance to support sluggish growth in Europe. The first 100 days of the US President will be decisive: his promised tax cuts and deregulation could stimulate growth in the short term, but increased protectionism is likely to slow the economy and exacerbate inflation. The prospect of a strong dollar could weigh on US exports and put dollar-indebted emerging economies in difficulty.
At the same time, the trend towards Artificial Intelligence concentrated stock market flows. A significant correction is to be feared if investors are disappointed about companies' ability to turn this technology into tangible results. In addition, the development of AI poses energy challenges due to its high consumption.
In Asia, China needs to refocus its growth on domestic demand to compensate for a more difficult international trading environment. Finally, on a global scale rising public debt remains a major challenge, with the US budget deficit of 6.3% of GDP in 2024 and a global debt reaching 93% of GDP.
European markets also offer a wealth of opportunities. In particular, the opportunity to invest in European champions with strong international exposure, and the opportunity to invest in sectors likely to benefit from catalysts that seem plausible to us. These include construction, which would benefit from the end of the conflict in Ukraine, real estate, which would welcome a more accommodative monetary policy from the ECB, industrial sectors (raw materials, chemicals, industrial goods, automotive) which would benefit from German and/or Chinese stimulus plans. More generally, sectors whose valuations currently reflect a slowdown scenario should rebound if sentiment improves.
Finally, we can also focus on differentiators. The ecological transition is underway in Europe and some of the leading players. The forthcoming fall in interest rates should accelerate investment in this area. Europe has a head start in this area and, with the rise in energy consumption linked to Artificial Intelligence, the need for clean energy will become an asset for the region.
Fixed Income
Early elections in Germany and a fragile government in France are weighing on the already lacklustre growth in the eurozone's two main engines. All the more so as the measures promised by Trump - lower taxes, a crackdown on immigration and higher customs tariffs - are likely to put Europe under pressure. These also carry an inflationary risk that should not be overlooked.
The Fed could then find itself torn between its two main concerns : inflation and employment. The labour market is beginning to send contradictory signals, while Donald Trump's desire to reduce immigration could accentuate tensions and increase wage inflation. A return to inflation would force the Fed to raise rates, creating instability in the credit market.
Equities
US Q4 earnings released (weekly stock performance):
JPM (+8%), Wells Fargo (+11%), GS (+12%), BlackRock (+6%), Citzens(+10%), Citi (+13%), BoNY (+10%), BofA (+3%), MS (+12%), StateSt. (+5%)
EU:
Richemont (+17%) also note LVMH (+7%), Hermès and Kering (+6%)
M&A :
Swiss SGS is to merge with French Bureau Veritas; Barclays secured 16% of Commerzbank; Intel (+13%) targeted by ARM and Qualcomm
Analysts:
Richemont (DB ’buy’ target CHF 175); Airbus (BNP and MS ‘overweight o/w’ target EUR 200); Dassault Aviation (BNP and MS ‘o/w’ target EUR 252 / 225); Thales (BNP and MS ‘o/w’ target EUR 176 / 161); Partners group (Citi and GS ‘buy’ target CHF 1450)
Rates
US curve (2-10 years) steepening decreased by 5bps to 35bps. Bond yields increased across the board, HY corporate spread slightly lower
Commodities
Oil price up, due to the cold wave in the US (-30 Celsius due on Monday) IEA increased its 2025 demand forecast so did OPEC
US
Dec CPI (+2.9%, Core +3.2% vs 3.3% prior), Dec PPI (+3.3% vs 3.0 prior)
Cryptos
XRP (+40%) on SEC’s lawsuit likely to be abandoned ; DOGE (+23%) Elon Musk favorite memecoin
Under the watch
LA wildfires impact on insurance and power companies bond ratings
Nota Bene
Basle III RWAs +10% for EU banks (US banks not yet impacted)
BP to cut 5% of its staff; Citi provisioned $600m for job cuts severance
CALENDAR
Monetary Policy releases: JP Bank of Japan (24 Jan) likely to raise rates by 25bps
Q4 Corporate earnings: US Netflix, Charles Schwab (21), P&G, J&J, Abbott lab (22), TI (23), Amex, Verizon (24); EU: Ericsson (24)
Markets Holidays: US Martin Luther King Day (20 Jan)
WHAT ANALYSTS SAY
- Rothschild & Co Asset management - Perspectives for 2025. Equities and Fixed Income
Rothschild & Co Asset management, 17 Jan 2025
Authors: Yoann Ignatiew, Head of International Equities; Anthony Bailly, Head of European Equities; Emmanuel Petit, Head of Fixed Income
· International Equities
We are approaching 2025 with a resolutely cautious stance, with no intention of position, with no intention of significantly re-exposing ourselves to risk in the current environment. The repercussions of the past global election year, combined with a second term for Donald Trump in the United States are amplifying the uncertainties surrounding inflation, growth and trade. At the same time, investors are having to navigate an environment with a new geopolitical reality, changes in supply chains and the meteoric rise of artificial intelligence.
Against this backdrop, we remain convinced that opportunities remain. In the US, the equity market remains attractive thanks to solid economic growth, robust earnings and strong innovation. Although flows remain concentrated in the ‘Magnificent 7’ , there are other opportunities, particularly in banking stocks, which should benefit from promised deregulation.
In terms of corporate results, expectations of extremely strong earnings growth of around 15% are worth watching. A disappointment could lead to a major sell-off.
In Europe, despite the drag from energy, political instability and low productivity, there are opportunities in the healthcare, industrial and luxury sectors, driven by globally competitive companies.
On a global scale. It is difficult to see the emerging countries as a homogeneous block, given the wide variety of economic characteristics. Nevertheless, on the whole, growth has shown notable resilience, and inflation has fallen sharply from the peaks reached in 2022. In China, despite major stimulus measures the Party is struggling to boost domestic demand. The November's announcements of monetary easing were disappointing, but the government still has room for manoeuvre to increase the deficit. Donald Trump's re-election and the threat of new tariffs could accentuate this pressure, forcing Beijing to prioritise domestic consumption in the face of a tougher export environment.
We remain committed to being exposed to local consumption in China and, more generally, in Asia and Latin America.
In conclusion, our scenario is one of an uncertain environment, in which the challenges of geopolitics, inflation and growth coexist with opportunities, particularly in specific sectors, sometimes neglected sectors and resilient regional markets.
Finally, while inflation is already proving to be more resilient in the United States than in Europe, the inflationary nature of Donald Trump's programme leads us to believe that the Fed could maintain the rather hawkish tone displayed at its December meeting.
On the other hand the situation looks very different in Europe, where inflation continues to fall, offering the ECB more room for manoeuvre. A further fall in interest rates could support lending, revitalise economic activity and ultimately benefit equity markets.
·Fixed Income
We expect the economies and monetary policies on both sides of the Atlantic to be out of sync. Together with monetary policies on both sides of the Atlantic in 2025.
The central banks seem to be staying on course and yield curves are continuing to steepen, increasing the risk to longer rates.
Based on market expectations, with four rate cuts currently envisaged, the European trend has aligned with the US trend. The ECB's terminal rate could therefore be above 2%. However, it is likely that the ECB be forced to adopt a more sustained pace, as growth remains its main concern, while political uncertainties continue to weigh, as do the new US president's protectionist impulses.
In the United States in particular, it seems hard to envisage the Fed to make any further rate cuts, not least because of the inflationary risks associated with the future US administration's programme.
So far, the central bank has managed to bring inflation closer to the target without triggering a recession, making the quasi-idyllic ‘Immaculate Disinflation’ scenario a reality. It seems likely that the neutral rate could now be higher than previously envisaged. The market will be closely scrutinised, as will the impact of the measures promised by candidate Trump. It cannot be ruled out that the US central bank may have to raise interest rates during 2025.
This new year should nevertheless be a continuation of 2024, with a gradual steepening of the yield curves. Agility will be key, as opportunities could arise from events and decisions with contradictory effects in different zones.
To sum up, the credit market's resilience will depend on monetary policies within the macroeconomic environment. In this context, the flexibility displayed by the Fed contrasts with the apparent rigidity of the ECB's timetable. However, given current fundamentals, the asset class continues to enjoy attractiveness.
We remain attentive to the cyclicality of our positions and to credit quality in general. While the valuations of some segments may appear high, we believe they are justified in terms of fundamentals and as long as the macroeconomic environment does not deteriorate.
· Black Swans
Equities
In 2025, a number of key factors could influence the markets. These include the divergence in monetary policies between the Fed and the ECB. The Fed could maintain high rates to contain inflation stimulated by Donald Trump's expansionary policies, while the ECB is likely to adopt a more accommodative stance to support sluggish growth in Europe. The first 100 days of the US President will be decisive: his promised tax cuts and deregulation could stimulate growth in the short term, but increased protectionism is likely to slow the economy and exacerbate inflation. The prospect of a strong dollar could weigh on US exports and put dollar-indebted emerging economies in difficulty.
At the same time, the trend towards Artificial Intelligence concentrated stock market flows. A significant correction is to be feared if investors are disappointed about companies' ability to turn this technology into tangible results. In addition, the development of AI poses energy challenges due to its high consumption.
In Asia, China needs to refocus its growth on domestic demand to compensate for a more difficult international trading environment. Finally, on a global scale rising public debt remains a major challenge, with the US budget deficit of 6.3% of GDP in 2024 and a global debt reaching 93% of GDP.
European markets also offer a wealth of opportunities. In particular, the opportunity to invest in European champions with strong international exposure, and the opportunity to invest in sectors likely to benefit from catalysts that seem plausible to us. These include construction, which would benefit from the end of the conflict in Ukraine, real estate, which would welcome a more accommodative monetary policy from the ECB, industrial sectors (raw materials, chemicals, industrial goods, automotive) which would benefit from German and/or Chinese stimulus plans. More generally, sectors whose valuations currently reflect a slowdown scenario should rebound if sentiment improves.
Finally, we can also focus on differentiators. The ecological transition is underway in Europe and some of the leading players. The forthcoming fall in interest rates should accelerate investment in this area. Europe has a head start in this area and, with the rise in energy consumption linked to Artificial Intelligence, the need for clean energy will become an asset for the region.
Fixed Income
Early elections in Germany and a fragile government in France are weighing on the already lacklustre growth in the eurozone's two main engines. All the more so as the measures promised by Trump - lower taxes, a crackdown on immigration and higher customs tariffs - are likely to put Europe under pressure. These also carry an inflationary risk that should not be overlooked.
The Fed could then find itself torn between its two main concerns : inflation and employment. The labour market is beginning to send contradictory signals, while Donald Trump's desire to reduce immigration could accentuate tensions and increase wage inflation. A return to inflation would force the Fed to raise rates, creating instability in the credit market.
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