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March 25, 2024 - A historic week for Central Bank action.

(please note that there will be no weekly review next Monday due to the Easter holiday).

Switzerland can be thought to boring, but its authorities know how to surprise the world. Some of our readers might remember the day in early 2015 when the Swiss National Bank (SNB) decided to abandon the 1.20 floor on the exchange rate with the EUR, creating havoc in financial markets. This time they chose something less dramatic but nonetheless impressive: to be the first G-10 country to "jump the gun" and cut interest rates. Tradition has it that among the major central banks, the FED is usually making the first move, with the ECB to follow and the SNB "copying-pasting" the ECB. Perversely, this time the SNB moved first, while there is a high probability that the ECB will act before the FED, totally reversing the usual order.

The decision of the SNB to cut policy rates to 1.50%, seemed to have been driven by at least three factors: First, the inflation forecast path has been shifted lower by around 50bp, with the end-point now showing 1.1% in 2026 (down from 1.6% in December), as the bank no longer expects further increases in the mortgage rates and wage growth did not present risks to price stability. Second, the SNB apparently became much more concerned about the recent appreciation of the currency, which pushed the EURCHF to a low of 0.93. In this regard, the policy statement notes that the rate cut also supports economic activity (primarily exporters). Third, Chairman Jordan outlined in the press conference that he sees less risks in lowering rates earlier, than in keeping rates restrictive for longer, given the recent lukewarm growth data. There are only two more meetings left for the year (June and September) and the market believes that interest rates will be cut at both of them.

The Japanese also had their moment in history as they ended the NIRP (negative interest rate policy) after 8 years in place. Again this move was not expected until April, although the recent data were pointing to the inevitable hike of interest rates by the central bank anytime soon. The official rate is now at 0.0%-0.1% and the governor said that they will proceed with caution as they want to make sure that inflation is sustainable and controllable. As a reminder, Japan has been suffering from the lack of "good inflation" for decades, with falling consumer prices hurting economic growth and company profitability. Hence a healthy dose of inflation is for them a gift, which they wish to maintain.

The FED gave us no new information, at its March meeting. We already knew that it doesn’t have the data in hand to be confident that inflation will decline to its 2% target. Mr. Powell explained during his press conference that while the stronger January and February inflation numbers appeared to be just bumps in the road, the Fed couldn’t take that for granted. But the FED also highlighted again that they take the risk of the economy falling into a recession seriously, and wish to avoid it. The market is pricing the first cut in June and as for the fully year, pricing is now falling just below the 75bp that the FED itself has predicted. As a reminder, this market pricing was at 150bp in late December. Powell also said the Fed certainly wanted to avoid the circumstances where it cut rates and then discovered it needed to raise them again. The Fed also adjusted the dots for 2025 from 100bp of cuts to 75bp, indicating that it does expect the easing cycle will take longer than it previously thought. All in all, the FED appears to be the last to be cutting rates among the major central banks.

The Eurozone March (Purchasing Managers Index) PMIs showed a mixed picture, but the composite index further improved. It increased 0.7 points to 49.9 and approached the neutral 50 points mark. The increase was largely driven by the pick-up in services and to a lesser extent manufacturing output. The Services PMI was up 0.9 points to 51.1, the highest since June 2023. In contrast, the manufacturing sector continued to contract with the Manufacturing PMI down 0.8 points to 45.7. But we have to note that the Red Sea disruptions earlier in the year was an important drag, contributing 0.6 points to the decline in the Manufacturing PMI, according to the respondents. On a positive note, manufacturing output and new orders showed a marginal improvement. Also encouragingly, the input and output price indices both moved lower in March.

The US March PMIs showed improvement in Manufacturing and a small deterioration in Services. The Manufacturing index rose to 52.5 vs. expectations for a drop to 51.7, but Services fell to 51.7 vs expectations for a fall to 52.0. We should note that manufacturing had spent all of 2023 below the neutral rate of 50 and now it is the third month that the index is in expansion territory (>50). It is also the highest number since September 2022. Overall, the composite index dropped to 52.2 from 52.5 the previous month, but that was in-line with expectations. These numbers are consistent with the scenario of a soft-landing for the economy, or in other words not a very hot economy, but also not collapsing.

The Bank of America's latest monthly fund manager survey highlighted a flight into European and emerging market equities at expense of US equities. The monthly survey showed that the participants had the biggest jump in allocations to European equities since June 2020, and the biggest increase in allocations to Emerging Market equities since April 2017. The risk appetite is now at the highest since November 2021, which is when Nasdaq hit its high before correcting into 2022. The survey also showed that investors are split on whether AI stocks are in a bubble, with 40% saying yes and 45% answering no.

US equities continued their march higher, outpacing their European peers. The S&P500 added 2.5% for the week while Nasdaq rose by almost 3%, despite the correction in Apple's shares. The "winner" of the week was the new market darling (Japan), with Nikkei adding almost 6% , as the market cheered (!!) the fact that the Bank of Japan started raising interest rates. There is no logic behind it other than the markets are in a party mood looking for the slightest positive detail even in negative news, in order to move higher. When interest rates start rising, as it happened in Europe and the US, bond and equities should correct and the Japanese currency should strengthen. The inverse took place.

Bonds moved higher and yields fell, as the SNB move to cut rates triggered a positive sentiment on the asset class. The FED and BoJ meetings, although tilting on the hawkish side, were taken by market participants as dovish, a fact which helped bonds recover part of their lost ground of this year. The US 10-year yield dropped to 4.20% and the German equivalent to 2.30%, bringing the total drop of the week close to 10bp (about 0.7% increase in price).

Chart of the Week : Short-term positioning points to a high risk of a (mild ?) correction in equities ahead.

The above chart by UBS shows the evolution an index which is constructed using the positioning of various market participants (from hedge funds to retail investors) as well as other technical indicators. Its goal is to warn for short-term or longer-term turns in the market (negative or positive). When the indicator is at very low levels on the chart it is usually when the market has fallen a lot and a good to time to buy. One can see this for example in 2008 deep in the financial crisis and in 2020 when the pandemic first hit. But it also gives some sell signals when the indicator is very high in the chart. For example, last time we crossed the 1-standard deviation from the average level (green dotted line) it was in November 2021, when the market peaked and the 2022 correction followed. We have now reached 2-standard deviations above the average and the indicator is at the previous all-time highs (2013 and 2018), which are indicated in red. These levels triggered corrections. Of course we cannot base investment decisions on such charts alone, but equities are now stretched by many measures. At the same time, no one knows where the short-term peak is, especially when the momentum is very positive.


• 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 : UBS , Photo: CHAD CROWE, Wall Street Journal


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