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27 February, 2023 - Will peace be given a chance ?

We have already reached one year from the day that Russia invaded Ukraine. There are very few signs that a peace deal could arrive any time soon, despite the diplomatic efforts which have surfaced from time to time. China just released a peace plan which was welcomed by the Ukrainian President but there were no real breakthroughs in it and was received with skepticism by Europe. The Chinese peace plan is probably an effort to recast Beijing’s image as a neutral and constructive player on Ukraine. At the same time during the G-20 meeting there was no agreement on a common text-announcement with respect to supporting Ukraine, with the Chinese chosing to be on neither side of the battle. NATO is pushing for an increase in defense spending among its members and most of them have already announced major government spending on new tanks, airplanes, ammunition etc for the coming years. Investing in defence companies will continue to offer good returns.

Equities had a rough week, as the repricing in the bond market continued. US equities fell by 3% on average, with Nasdaq being the worst performer (-3.3%) among the major indices. The S&P500 closed at 3970, where it was in the middle of January, losing all gains of February and now being up just 3.5% for the year. Europe fell by 2% on average, with Swiss stocks out-performing with a much less drop (-0.7%). We would reiterate our call for getting defensive again, as mentioned in our weekly review two weeks ago. Chinese equities moved against the trend, with small gains of about 0.7%, while Japan's Nikkei was almost unchanged.

Bond prices continued to fall as the market is undergoing a major repricing. As mentioned in our previous weekly review, the bond market has waken up again to the possibility of interest rates moving higher than anticipated during the January/February rally. To be clear, the previous move (rally) in bonds was against the messaging from the FED (and the ECB) who chose to remain hawkish, even if they toned down a little their rhetoric during their last meetings. The higher than expected inflation reports since these meetings was the catalyst for the bond markets to move lower and take the equity markets down with them. The US 5-year bond moved to 4.20%, higher from the 4% at the end of last year and up 85bp from the 3.45% low of mid-January. In the Eurozone, the German 5-year yield is now trading at 2.65%, up from 2.50% at the start of the year and 60bp higher than the low of 2.05% in mid-January. The high quality bonds of duration 3-5 years are getting interesting again to start buying.

No surprises from the publication of the minutes of the last FED meeting. Speaking of central banks, the minutes of the last FED meeting did not reveal any new information rather that there are still few voices who are in favor of 50bp increases, rather than the 25bp which was decided in early February. However, the vast majority of the voters continue to be in favor of moving in 25bp steps from now on. A terminal rate of around 5.35% is now becoming the consensus in the markets, with fears for a move past 5.50% starting to appear. The next meeting is on March 20-21st.

The PCE deflator (Personal Consumption Expenditure) rose in January, vs expectations for a fall. The PCE is the FED's favorite measure of inflation, rather than the CPI. The index rose to 5.4% vs 5.3% in December and against expectations for a drop to 4.9%. The Core PCE also rose to 4.7% from 4.6% in December and against expectations for a fall to 4.3%. These inflation numbers are in-line with the disappointing CPI numbers for January, which were also worse than expected.

The US 4th quarter 2022 GDP was revised lower. The GDP rose by 0.9% on a quarter-on-quarter basis, vs the previous estimate of 1.0% and 2.7% compared to the Q4 of the previous year vs the initial reading of 2.9%. As already mentioned, although the 2.7% is still a robust growth number, the details show that there was a large inventory build-up during the last quarter which on one hand might show lack of demand and on the other hand it is most probably not going to be repeated in the current quarter, shaving-off several basis points from the first GDP reading of this year. This was also acknowledged in the FED minutes which were released.

The February PMI indices for the Eurozone showed a mixed picture. Manufacturing showed a deterioration vs January, when it rose by more than expected. The index fell to 48.5 vs 48.8 in January and against expectations for a further rise to 49.3. The manufacturing index remains below 50, which signals expansion. However the services index rose to 53.0 from 50.8 in January and against expectations for a rise to 51.0. France contributed the most in this positive surprise among the major Eurozone countries. But overall, the PMIs confirmed that there is at least a stabilization in the economies.

A similar picture in the US PMI indices for February. Services rose back above the 50 level at 50.5, vs 46.8 in January and expectations for a small rise to 47.0. Manufacturing continued to be the "weak link" remaing below 50, at 47.8 , but it was better than the January level (46.9) and the expectations (47.2).

The USD strengthened further and Gold moved lower. The rise in bond yields and the expectations for higher interest rates for longer has benefited the USD in recent weeks and has hurt the yellow precious metal. The EURUSD fell closer to 1.05, after having traded at 1.10 just a few weeks ago. Gold is trading again closer to 1800$, after hitting 1950$ a few weeks ago too. The performance of Gold in USD is now negative for the year (-0.7%).


Chart of the Week : The S&P500 is approaching significant support levels.

The above chart shows in blue the S&P500 index for the last 12months. The index has corrected about 5% from the recent high in early February and has lost the 4000 level, which is primarily a psychological support. It has also lost its short-term support of the 50-day moving average, not shown above. But the index is approaching the 3940/50 levels which could provide strong support. This is where the red support line is , which connects the lows of October and December but also the important 200-day moving average, shown by the green line.


• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : Factset


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