Markets are now priced for no recession and deep cuts at the same time. If that was true, it would be too easy for investors. Moreover, a look at stimulus in China and political uncertainty in France.
Markets – It’s not easy like Sunday morning
Markets are now priced for no recession and deep cuts at the same time. If that was true, it would be too easy for investors. As Fed starts cutting rates, we believe it is a good time to reduce duration risk and market beta. As we argue in our new Algebris Bullet, the US economy is too solid for the amount of easing priced, and positioning in duration expressions is at highs. The US fiscal picture is deteriorating quickly, and elections may remind markets about this fact. Historically, first Fed cut has been a sell signal for long bonds. We see more value in credit, selectively. Market spreads are tight, but dispersion is high across all markets. We like selected issuers with 500-700bp type spread across financials, telecoms, utilities, and emerging market sovereigns.
China – Stimulus from the East
Chinese authorities are ramping up stimulus at the strongest pace since late 2022. In the past week, the central bank has cut multiple interest rates and injected 1tn Yuan in the local markets. The government has announced housing market support and injected new capital in state banks. The Communist party has signalled fiscal stimulus coming the second half of October and ledged for explicit coordination between monetary and fiscal policy. Current announced measures are small, worth 0.3% of growth, but markets are pricing more substantial easing coming. Authorities acted urgently because recent macro data showed pronounced weakness in the household sector, putting growth targets at the risk. Chinese equities rallied aggressively, but remains heavily underweight in global portfolios, so we see scope for more upside if further stimulus materialises.
France – Political drama
In France, political uncertainty is on the rise. President Macron was able to form a government and will now try to pass a budget. The situation is complicated by the lack of political capital for the new government. Without new measures in place, 2024 deficit may hover around 6%, 100bp higher than previously thought. The date for budget publication has slipped from October 1st to the second half of the month, in an attempt for the new cabinet to build a consensus. Lack of support from the left is granted, and it remains unclear what measures could be supported by the right too. We see uncertainty to remain high, but not enough for the EC to step up further measures against France (the country is already under an excessive deficit procedure). OAT-Bund at multi-month highs (80bp) suggest French assets are already pricing a negative scenario.
Algebris Investments’ Global Credit Team
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