Geopolitics – The worst is averted (so far)
Geopolitical risk premia are compressing after the Israeli reaction on Iran. The fact that the reaction was less than proportional to the initial attack was perceived as de-escalatory, and markets are re-pricing lower chances of an open confrontation between Israel and Iran. Oil is 5% off its highs reached last Thursday, and European stocks 3% off the lows. Global rates re-started grinding higher, focusing back on the Fed and inflation. While we agree on the immediate market take, we continue to find risk expensive, especially credit and some segments of equity markets. The recent Middle-East tensions triggered a moderate re-pricing after a very long rally. Thus we see markets vulnerable to another round of tensions or other shocks, and maintain a cautious attitude on credit.
Fed – Hawkish talk
The Federal Reserve finally changed tone over likelihood of immediate cuts, following recent strength in US data. In his remarks in Washington DC, chair Powell guided for higher interest rates for longer, as inflation and labor market momentum remains solid. He removed from his speech the notion of restrictive policy and the need for cuts this year, de facto removing a cut in June from the table. The Fed then went back to “on hold” stance, until new information on inflation emerges. Markets are already priced for this outcome, with one cut and a half priced for 2024 (vs a high of six in January) and US two-year rates at 5%. We see both cuts and further hikes unlikely in the next six months.
IMF meetings – Dispatch from Washington
We attended the IMF meetings in Washington DC last week. Compared to October, the consensus is less negative, particularly on risk, also helped by recent strength in US data. The Fed is signalling a new cautious stance, with no cuts in June, small chances of cuts thereafter, and very small chances of hikes. The ECB has found an internal consensus for a June cut, but we feel there is no agreement for any move past that. US fiscal is a concern for global investors, but markets is not focusing on US elections yet. Geopolitics is quickly turning the main focus in investor minds. In EM, Turkey continues to be a constructive story, and there’s broad appetite for countries about to re-access capital markets. In LatAm, there’s a debate on monetary policy following the Fed hawkish turn. Most countries will continue to cut, in our view.
Algebris Investments’ Global Credit Team
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