- Equities: US Equities reached record highs on expectations of rate cuts, supported by resilient consumer spending and over USD6t sitting on the sidelines
- Credit: Historical widening of credit spreads following a Fed pause underscores need for selectiveness in credit risks. Sweet spot remains with A/BBB Credit in 3-5Y duration segment
- FX: BOJ getting closer to ending its ultra accommodative monetary policy; Potential JPY recovery vs DM currencies amid weak USD bias
- Rates: USD rates undecided on direction after passing through US labour data; 2Y to 10Y yields close to the bottom of recent ranges
- The Week Ahead: Keep a lookout for US Initial Jobless Claims; Japan PPI Number
Related insights
US Equities reached all-time high as Fed signals potential rate cuts. Investor optimism surged as Fed Chair Jerome Powell's testimony before a Senate committee ignited hopes for rate cuts in the June Federal Open Market Committee (FOMC) meeting. Powell's remarks, suggesting the central bank was nearing a point where it could confidently begin reducing interest rates, provided the catalyst to propel US indices to unprecedented levels. The S&P 500 and Nasdaq rallied to record highs on Friday’s (8 Mar) trading session. This remarkable milestone was achieved despite mixed economic data. Despite a higher-than-expected unemployment rate of 3.9% for February, compared with the consensus estimate of 3.7%, the US economy added 275k jobs, surpassing the forecasted 200k figure.
We continue to remain constructive on US Equities as we head into 2024, buoyed by the prospect of the Federal Reserve initiating interest rate cuts as early as June. Complementing this tailwind is the remarkable resilience exhibited by consumer spending, underpinned by a robust labour market and solid wage growth. Moreover, the staggering USD6t parked in money market funds on the sidelines could further propel the rally.
Topic in focus: Europe Equities – Sluggish outlook continue to weigh on earnings. With c.60% of companies having reported earnings, STOXX 600 EPS beats are at a near decade low. Consumer Discretionary, Consumer Staples, Technology, and Financials posted strong earnings beats, while Energy and Materials were among the weakest. Earnings revisions and expectations continue to trend south for Europe Equities, with consensus expecting mid-teens contraction in 1Q24.
On the back of abating inflationary pressures, a more accommodative European Central Bank (ECB), and cyclical recovery in the manufacturing sector, we believe Europe’s economy should show signs of stabilisation in the later half of the year. As we await pivotal factors for upward revaluation, we remain defensive on Europe Equities – we stay overweight on the Tech sector, focusing on upstream semiconductors. In Real Estate, we maintain specific interest in logistics and data centre-related assets. While European banks had a good year in 2023, we expect headwinds from slowing economic growth and declining interest margins. For the luxury sector, we advocate brands which align with the “Quiet Luxury” theme. Healthcare earnings should stay resilient through economic cycles, particularly those specialising in medicines for conditions such as obesity and cancer.
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