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Q4 Guide to the Markets
Comprehensive insights on all the latest global economic and market developments.
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Explore the benefits of standard money market strategies amid non-recessionary rate cuts, including higher yields and extended Weighted Average Maturity (WAM). Understand why cash investors are increasingly opting for these strategies.
The Federal Open Market Committee (FOMC) took the first step in easing monetary policy with a long-anticipated cut to the federal funds target rate of 50 basis points to 4.75-5.00%.
Explore the European Central Bank's recent decision to cut interest rates and its data-dependent approach to future monetary policy. Understand the implications for inflation, GDP growth, and market reactions, as well as strategies for EUR cash investors
Explore how major central banks' policy adjustments are impacting liquidity investment strategies. Learn about the anticipated rate cuts, strong credit fundamentals, and how to adapt investment strategies in the current economic environment.
The ECB and BoE are cautiously approaching rate cuts, with decisions being heavily data-dependent. The ECB is expected to continue cutting rates at alternate meetings into 2025, while the UK base rate may remain unchanged in the near term. Both central banks are balancing the need to support economic growth with the risk of resurgent inflation.
Moderating inflation has allowed central banks to shift their focus towards fostering economic growth, signaling an impending monetary policy pivot. While markets have quickly priced in multiple rate cuts, the pace and magnitude of central bank actions remain uncertain. For APAC cash investors, the implications of the Federal Reserve (Fed) policy continues to be significant; but local inflation, economic conditions, and political nuances will also influence regional cash investment strategies.
The Monetary Policy Committee (MPC) voted by a narrow majority of 5-4 to reduce the Bank Rate by 25 basis points to 5%. This is the first cut since March 2020. Governor Andrew Bailey stressed a cautious approach and said the Bank of England (BoE) is alert to risks of another surge in inflation.
On 22 July, the People’s Bank of China cut its 7-day Reverse Repo rate and Loan Prime Rate by 10 basis points. The decision shows the central bank is shifting its focus to the 7-day Open Market Operation rate as its new policy benchmark.
Predicting and timing a rate-cutting cycle is challenging. Focusing on what they can control can help cash investors to capture current yields while strategically positioning for future rate declines.
At its monetary policy meeting on the 6 June, the European Central Bank (ECB) cut its key interest rates by 25 basis points (bps). The rate cut was broadly signalled by the central bank and widely expected by investors.
Singapore and HK interest rates have moved sharply higher over the past few years, abetted by a high correlation with US monetary policy. However, they have echoed rather than mirrored the upward trend in US interest rates.
Falling inflation across APAC has raised expectations of rapid central bank rate cuts to boost flagging domestic growth – however APAC central banks appear reluctant to diverge from the Fed.
We believe that interest rates in developed markets have peaked, with central banks likely to initiate gradual cuts rather than returning to the near-zero levels seen in recent years. The anticipation of declining interest rates, alongside a resilient macroeconomic outlook and favourable all-in yields, could present one of the best environments for standard money market strategies in the last 15 years, in our opinion.
With US inflation finally trending downwards, the Federal Reserve (Fed) has pivoted to a more dovish bias, although the timing and extent of future rate cuts remains uncertain. Across the Asia-Pacific (APAC) region, inflation is also declining, raising the prospect of lower regional interest rates. However, the impact will likely be more variable due to country-specific nuances.
With Q1 '24 underway, Kyongsoo Noh answers the top five questions on the minds of liquidity investors.
At its first monetary policy meeting of 2024, the RBA left its OCR unchanged at 4.35%. The decision was in-line with market expectations, although the tone of the accompanying statement was more hawkish than expected.
The BoE held the Bank Rate steady at 5.25% for the fourth consecutive meeting but removed their bias towards the next move being another hike in rates. Notably, the decision was not unanimous as two members continued to vote for a 25 basis point (bp) hike, while one member voted for a 25bp cut leaving six members, including the Governor voting for unchanged rates.
On 29th January, the Monetary Authority of Singapore (MAS) decided to maintain the prevailing rate of appreciation of the S$NEER policy band, with no change to its width nor centre point.
At its first monetary policy meeting of the year on 25 January 2024, the European Central Bank (ECB) kept all key interest rates on hold. This was the third consecutive meeting to conclude with no change to monetary policy, with the last rate hike occurring in September 2023.
BOE voted to maintain Bank rate at 5.25% (6:3 split for hike) again. The Panel maintained its guidance that rates would need to be “sufficiently restrictive for sufficiently long” to curb inflation.
At its monetary policy meeting on 14th December 2023, the European Central Bank (ECB) kept all key interest rates on hold, for a second consecutive meeting. The ECB announced that reinvestments of the Pandemic Emergency Purchase Program (PEPP), will decrease by 50% from July 2024. President Lagarde stated that the Governing Council (GC), will not let its guard down, in the fight against inflation.
The Federal Open Market Committee (FOMC) left the federal funds target range unchanged at 5.25-5.50%, as anticipated. However, the quarterly update for the Summary of Economic Projections (SEP) suggested a dovish bias, with the “dots” pointing towards three cuts for next year, with a rate at the end of 2024 of 4.50-4.75%. The market reacted by increasing expectations for rate cuts in 2024, pricing in cuts more aggressively than the Fed.
When comparing short-term money market strategies with step out strategies such as standard money market or ultra-short duration bond strategies, it’s important to consider the future total return potential rather than just today’s yield.
At their last monetary policy meeting of the year on 5 December, the Reserve Bank of Australia (RBA) left the Overnight Cash Rate (OCR) unchanged at 4.35%. This was in line with market expectations.
Market attention has veered towards other policy options that are at the disposal of the ECB’s Governing Council (GC). One such option, the remuneration of Minimum Reserve Requirements (MRR), has recently come under particular focus. While not widely understood, adjustments to this rate could have significant implications for short term interest rates and liquidity demand.
At its monetary policy meeting on the 7 November, the Reserve Bank of Australia (RBA) decided to raise the Overnight Cash Rate (OCR) by 25bps to a 12-year high of 4.35%. The rate hike, which follows a five-month hiatus was widely anticipated by economists following stronger than expected economic data.
At its November Monetary Policy Committee meeting, the BoE voted to maintain the Bank Rate at 5.25%. The BoE’s Governor Andrew Bailey noted that inflation has fallen, and is expected to fall further this year and next year, while monetary policy is viewed as restrictive.
At its monetary policy meeting on 26 October 2023, the European Central Bank (ECB) kept all key interest rates on hold, the first pause after 10 consecutive rate rises.
At its semi-annual monetary policy meeting on 13 October, the MAS decided to maintain its prevailing monetary policy stance Fig 1a for a second meeting - following five previous upward adjustments. The decision was In-line with expectations, with the central bank leaving the slope, band width, and mid-point of SGD NEER unchanged.
At Michele Bullock’s first monetary policy meeting as the Governor, the Reserve Bank of Australia (RBA) decided to leave the Overnight Cash Rate unchanged at 4.10%. This was the fourth pause in the central bank’s rate hiking cycle.
The US is about to conduct its most polarized Presidential election in 100 years.
NVIDIA and its GPU customers are now a large driver of equity market returns, earnings growth, earnings revisions, industrial production and capital spending.
A surge in the Japanese Yen is resulting in home repatriation of Yen-funded positions overseas, and close-out of Yen-funded positions abroad. While Google was found guilty of home bias anti-competitive search engine behavior, any judicial remedies could be as bad for recipients of Google’s shelf space payments as they are for Google itself. Work-from-home trends have plateaued at ~30%, which has important implications for owners of impaired office buildings. Most distressed sales now require discounts of 60%+ vs pre-COVID levels; the fundamentals of the office sector explain why.
From 1930 to 2010, there were six extended periods of small cap outperformance as it dominated large cap over that entire period. But since 2010, small cap sits alongside value stocks and non-US stocks in the unholy trinity of underperforming portfolio strategies. While poor profit fundamentals argue against a prolonged period of outperformance vs large cap, small cap stocks are at their cheapest levels in the 21st century with potential market and political catalysts in their favor. First, a few words on the CrowdStrike outage.
US small cap stocks were the lions of the 20th century, generating substantial returns over large cap stocks during six different extended periods of time. It has been 20 years since the last one due to a combination of poor small cap profit fundamentals, higher exposure to rising interest rates and the pricing power accruing to the largest stocks in a winner-take-all economy. Small cap has joined value stocks and non-US stocks in the trinity of severely underperforming asset allocation strategies. Relative to large cap, small cap stocks are now at their cheapest levels in the 21st century. While poor fundamentals argue against a seventh multi-year small cap outperformance regime, small cap is much closer to fair value for diversified portfolio investors.
Recent Supreme Court rulings may now usher in the largest pushback on the regulatory state since the Reagan Administration. A look at the end of Chevron deference, a revised statute of limitations for challenging government regulations, the Major Questions Doctrine, the right to a jury trial and a District Court injunction against Biden’s LNG export moratorium.
US Presidential elections: a brief primer on candidate replacement; Supreme Court decisions. As part of our ongoing coverage in the Eye on the Market of issues related to the US political process (third party candidates, the 11th and 12th amendments, the Electoral Count Reform Act, faithless electors, the No Labels movement, etc), I want to share a brief description of what we understand regarding candidate replacement procedures after the last Presidential primary and before the general election in November.
Investing in professional sports leagues and related businesses. As rules around private equity ownership of sports leagues expand, we review team valuations and profitability, emerging sports categories, streaming and broadcast revenues, the decline of regional sports networks, drivers and comparisons of league parity, relegation and financial pressures in the English Premier League, stadium subsidies, sports betting and other adjacent businesses, antitrust issues, the esports winter, the worst teams that money can buy and the best basketball players of all time.
With spring planting season having arrived in Zone 7, it’s a good time to review agriculture from an investor’s perspective. Topics include agricultural price inflation in the wake of Russia’s invasion of Ukraine; public and private equity investments in agriculture, farmland ownership and the drivers of farmland returns; seed bio-engineering designed to reduce consumption of fertilizer, fungicide and water; and some satellite data on the immense agricultural damage occurring in Gaza and Israel. The Appendix addresses the avian flu’s impact on agriculture and the food supply.
Cicadian Rhythms: the fading prospects of a US disinflationary boom; Japan’s structural reform/M&A emergence; and Eye on the Market mailbag responses to questions on Tesla/Musk, GLPs, housing, China, Truth Social and Meta’s latest open source model
The Good, the Bad and the Ugly: on tech valuations, AI, energy and US politics Last week I spoke to the firm’s tech CEO clients at a conference in Montana. This note is a partial summary of that presentation, entitled “The Good, the Bad and the Ugly: an investor lens on tech valuations, AI, energy and the US Presidential Election”.
Electravision. The predominant vision for the future involves the electrification of everything, powered by solar, wind, transmission and distributed energy storage. This vision primarily relies upon the greater efficiency of electric motors and heat pumps vs their fossil fuel counterparts. While the grid is getting greener, electrification is advancing at a much slower pace for reasons related to chemistry, physics, cost, politics and human behavior. Our 14th annual energy paper takes a closer look, and also includes sections on nuclear power, China, hydrogen, “net zero oil” and Gaza’s energy future.
Five Easy Pieces: on Magnificent 7 stocks, open source large language models, the No Labels movement, the Armageddonists and bottom-fishing in Chinese equities.
This Eye on the Market is about all the things that can be true at the same time. The collapse of the political middle in Congress should not be an excuse for everyone else to abandon the ability to believe things that may appear contradictory, but which are all part of a more complicated reality.
Falling US inflation and possible Fed easing are increasing talk of a soft landing rather than a hard landing and bear market. Our 2024 Outlook takes a closer look at equities, fixed income, China, Japan, antitrust, weight loss drugs and ten surprises for 2024.
A review on industry returns in private equity, venture capital, hedge funds, commercial real estate, infrastructure and private credit
Six questions and answers on the intersection between geopolitics, US politics and financial markets
A comparison of NYC to 21 other US cities with respect to urban recovery, commercial real estate, mass transit, crime, outmigration, work-from-home trends, tax rates, economic pulse, fiscal health, unfunded pensions, energy prices, industry diversification and competitiveness.
I asked Chat GPT-4 questions on economics, markets, energy and politics that my analysts and I worked on over the last two years. This piece reviews the results, along with the latest achievements and stumbles of generative AI models in the real world, and comments on the changing relationship between innovation, productivity and employment. The bottom line: a large language model can process reams of text very efficiently, and that’s what it’s made for. But it cannot think or reason; it’s just something I paid for. Upfront, a few comments on oil prices.
Global Resilience to higher rates
The impact of underperforming 2020 and 2021 US IPOs
Comments on mega-cap stocks and artificial intelligence. Then, it’s time for some of my unsolicited letters to Barron’s, MSNBC, “No Labels”, FHFA and more.
Time to retire the US/Emerging Markets barbell for a while
Oh, The Places We Could Go: on the US dollar, reserve currencies and the South China Morning Post
Frankenstein’s Monster: banking system deposits and the unintended fallout from the Fed’s monetary experiment; commercial real estate, regional banks and the COVID occupancy shock; the wipeout of Credit Suisse contingent convertible securities; a market and economic update; and an update on San Francisco, which has experienced the weakest post-COVID recovery of any major city in North America.
Renewables are growing but don’t always behave the way you want them to.
One of these things is not like the other, and that thing is Silicon Valley Bank.
US economy stays warm, large language model battles get hot
The Federal debt and how the Visigoths may try to break the system if no one fixes it.
The End of the Affair. The affair with market catalysts of the last decade is over now, and a new era of investing begins. A look at a world of higher inflation, more regionalized trade and investment and more capital scarcity.
A discussion of the YUCs, the MUCs, FTX and three rules for investors: the Gensler Rule, the Sirens Rule and the Summers Rule. Our 2023 Outlook will be released as usual on January 1st.
A preliminary read on midterm election results given the context of prevailing market and economic conditions.
My list of things I am thankful for this year: CH4, HR4346 and mRNA-1273. Of course, your mileage may vary.
Three reruns for investors. First, in almost every post-war bear market, equity declines preceded the fall in earnings, growth and employment. As a result, we’re more focused on changes in manufacturing surveys than on the other victims of a recession as a sign of the bottom. Second, Graham Allison’s rising power conflict analysis and its historical precedents come back into focus with the latest US policies cutting off high performance semiconductor exports to China. Third, another press article on a small country as a prototype for a renewable future that does not address its irrelevance for larger developed or developing economies.
Three topics this week: the repricing of risky credit, labor markets and a COVID recap. While equities are pricing in a much greater probability of recession now, the credit markets are just getting started. One canary in the coal mine: the Citrix financing, which will be followed by a string of even weaker credits. On labor markets, the Fed is facing the tightest labor supply conditions in decades. Can second chance policies easing the path to employment for people with criminal arrest records help increase the labor supply, or will the Fed have to crush the economy to restore desired levels of wage and price inflation? Lastly, an update on bivalent vaccines and inhalable vaccines, as the latter offers the best chance of actually reducing infection and transmission.
Three topics in this month’s Eye on the Market. First, an update on the Fed, inflation and corporate profits since we believe the June equity market lows may be retested in the fall. Second, a detailed look at what would have to happen for the climate bill’s projected GHG savings to actually occur; the answer matters given the implications for the US natural gas industry. And finally, will all the new IRS agents really stick to auditing taxpayers above $400k? Data from the GAO suggests there may not be enough of them to meet the Administration’s revenue targets.
The global supply chain mess will require increased vaccination and acquired immunity, semiconductor capacity expansion and the end of extraordinary housing/labor supports to resolve. A close look at some very anomalous charts on shipping, semiconductors, inventories, labor shortages, foreclosures and mortality.
Greetings students. We look forward to seeing you back on campus. Your Fall 2021 syllabus is attached. Syllabus update: Biology BI66 “The Origins of COVID” has been cancelled until further notice.
Red Med Redemption: A visual depiction of politics, ideology, vaccine resistance and the Delta variant. Other topics: US economic recovery update, and big tech reliance on acquisitions to fuel growth at a time of rising anti-trust enforcement. We conclude with a new “Investor Odds & Ends” section that covers NYC hotel/office markets and possible changes in personal, corporate and international tax rates.
COVID and the Delta variant; the Fed as firefighter and arsonist; US-China economic divorce picks up steam; and the pig-snake inflation timetable (how long until we know if there’s a permanent wage/price rise).
Every two years, we take a close look at the performance of the private equity industry given its rising share of institutional and individual portfolios. Our findings this year: the private equity industry is still outperforming public equity, but this outperformance narrowed as all markets benefit from non-stop monetary and fiscal stimulus, and as private equity acquisition multiples rise. We examine manager dispersion, benchmarks, co-investing, GP-led secondary funds, the torrid pace of industry fundraising and manager fees in this year’s piece.
The election as referendum on America: how well does the “system” work, and for whom?
The US recovery; The flood of money and market returns; Globalization lives; Reducing COVID mortality through vascular treatments; Realistic timetables for never-been-done before vaccines; Sweden’s COVID experiment is not what you think
In this week’s Eye on the Market, we review topics from our recent client Zoom calls. Topics include: risk of inflation, second waves of infection, the effectiveness of lockdowns and Biden’s taxation and spending agenda.
In this week’s note, we discuss the latest news on US infection trends and reopening plans, Remdesivir trial results and whether US fiscal stimulus is “enough”.
Lockdown relaxation and economic reawakening…are we there yet?
In this week's note, we take a close look at country and regional virus data, and examine the pitfalls of over-extrapolating trends that often reverse.
After the equity rally, P/E multiples are back at around 16x 2021 consensus earnings.
Virus trends and head-fakes, convalescent plasma and U.S. vs. China lockdowns.
There are things the government can try and fix during a pandemic and other things which it can't.
There are some difficult days ahead as quarantines and lockdowns grow. I want to share something with you from John Stuart Mill as we head into the unknown.
A lot of data is being made available on the coronavirus, but most of it requires careful analysis before drawing conclusions.
Confounding almost every forecast we saw last week, Senator Biden appears to have emerged from Super Tuesday with a sizeable delegate lead. Why might the night have turned out so differently from what was expected just a few days ago?
A Coronavirus update: severity, consequences and implications for investors.
Consensus reactions to the Phase I US-China deal are very skeptical, but may be missing the broader point. A brief note on what happened, and the alternatives.
After a very positive year for investors in 2019, we expect lower positive returns on financial assets in 2020 as some Ghosts of Christmas Past reappear.
How a discussion about China and Hong Kong morphed into a chart war about Trump, Hoover, Taft, Rachel Maddow and Anderson Cooper.
While recessions and bear markets are a fact of life, something peculiar happened after the Global Financial Crisis: the rise of the Armageddonists.
A close look at the Progressive Agenda, China’s deteriorating welcome mat in DC and US Tech IPOs.
Michael Cembalest analyzes the performance of over 6,700 domestic and international active equity managers and discusses the challenges they face.
A brief comment on a proposal from leading Presidential candidates to ban hydraulic fracturing everywhere, immediately.
It was a long, hot summer at the Heritage Foundation. An update from the front lines of the Trade War.
Michael went on a search for Democratic Socialism in the real world, and ended up halfway around the globe from where he began.
Michael discusses how he should have taken Trump at his word on tariffs, and the impact of the widening trade war on global growth and equity markets as proposed tariffs approach pre-war levels.
The US-China trade war, prescription drug price legislation and the 2020 election.
Topics: unattainable objectives of the Green New Deal; overview of the world’s decarbonization challenges; Germany’s energy transition; Trump’s War on Science.
Explore the UK equity market's potential for recovery. Learn how shifts in corporate behaviour, supportive policies and an economic upswing can help drive demand for UK stocks.
This paper addresses the impact of Beijing’s coordinated policies on the recent Chinese equity market rally, and the long-term investment implications.
Explore the fiscal challenges and tough choices facing the UK's new chancellor, Rachel Reeves, as she prepares her first budget.
Understand why the US labour market is cooling and what it means for the economy.
Explore our article on whether a slowing US economy challenges expectations for corporate earnings.
Read our latest On the Minds of Investors article to understand what the outcome of the French National Assembly elections could mean for investors.
We explore what the UK election means for the economy and markets.
Japanese equities are in the spotlight, but investors should be mindful of the risks as well as the opportunities
We explore the potential economic and market scenarios stemming from escalating tensions in the Middle East.
Europe has made structural improvements and we think investors should sit up and take notice.
We look at why we think investors should look to diversify their exposure to the magnificent seven US stocks.
This paper, written by Tilmann Galler and Chaoping Zhu, discusses the recent Chinese economic data releases and the investment implications.
This paper, written by Chaoping Zhu, Marcella Chow and Tilmann Galler, discusses the outlook of China and policy implications.
Understand the drivers of small cap valuations and find out why small cap stocks could still offer attractive opportunities for long-term investors.
Read about the complex issues at the heart of measuring the financial impact of ESG investing.
This paper, written by Tai Hui and Tilmann Galler, discusses the outlook for India equities and the investment implications.
Green bonds are attractive instruments for working towards positive environmental benefits. Find out why demand for green bonds from investors is expected to continue to grow.
A forced and rapid energy transition is under way. Discover what impact this will have on commodity markets and clean energy investment opportunities.
The leader of the European Central Bank (ECB) has become very familiar with the challenge of ‘threading the needle’ in recent years and the test facing Christine Lagarde today was no different.
