Financial markets: Analysis and convictions of CPRAM - November 2024

Malik Haddouk, Director of Diversified Management, and Juliette Cohen, Strategist, decipher the markets, and Julien Levy-Kern, Diversified Portfolio Manager, shares his convictions on the themes to follow.

Bond markets have taken the lead this month with a strong rise in nominal rates despite stable oil prices and inflation expectations.

In the United States, state rates have increased by more than +30 bps on average across different maturities.

In the eurozone, the magnitude of the increase in nominal rates is smaller, especially for short-term rates. The macroeconomic backdrop continues to be positive, with solid US data, China finally deciding to stimulate its economy, and signs of stabilization in the eurozone economy.

The sharp rise in US Treasury yields is partly due to the increased probability of a total victory for Trump and positive surprises regarding US economic activity. However, we are approaching a critical point for risk assets, which we estimate to be around 4.5% for the US 10-year rate.

On the microeconomic side, earnings season is in full swing with high expectations. Earnings have also shown resilience, particularly in the United States. For the markets, it's "America first" with inflows into US stocks and a reversal of the downtrend in the dollar. However, capital outflows from Europe continue as the weakness in the macroeconomy and concerns about tariffs weigh on the region.

In the short term, caution is justified due to the uncertain outcome of the US presidential election. The rise in rates due to fears of fiscal instability is currently weighing on the reflation trade.

The surprising reaction of the bond market.

Indeed, it was not expected that yields on US government bonds would rise sharply at a time when the central bank had just lowered its benchmark rate by 50 bps.

However, this is exactly what happened, with 2-year and 10-year rates increasing by over 50 bps and 60 bps since the decision on September 18th. One can obviously try to understand what caused this unusual rise in yields across the yield curve, when the markets should have welcomed this rate cut as a sign of a more accommodative monetary policy.

Some reasons are put forward to explain the change in yield dynamics, such as the robust health of the US economy, a likely Republican wave in the presidential election on November 5th, and a less pronounced interest from foreigners in US Treasury bonds. One of the most plausible explanations would be that a Trump victory would de facto lead to tariff increases, which if materialized would result in higher prices and raise concerns about a return of inflation unfavorable to long-term rates.

The proposed reduction in corporate tax rates should also further widen the US deficit. The coming days will provide market participants with much more information to form a more precise idea of the extent to which the US economy will or will not land smoothly.

The victory of Trump is partly priced in, despite an election outcome that remains very uncertain. The markets are thus particularly nervous and despite volatility and rather mixed third-quarter earnings, the rotation towards cyclical stocks continues, driven by positive economic surprises.

Earnings releases are already well underway, and it is the financial sector that has relatively surprised the most positively, followed by telecommunications and energy. Over the month, the MSCI World is down 2%, and only these 3 sectors show positive performances, 3 sectors that are not well represented within the themes. Between mixed earnings releases and the implementation of the "Trade trump", themes related to climate change and themes related to demographic change are down by about 3.5% in October. Themes related to innovation fare better with a decrease of 0.5%.

For the upcoming thematic positioning, everything is linked to the outcome of the US election. "Make America Great Again" could transform global trade. The most impacted sectors would be automotive, leisure, clothing, and luxury, and therefore the Well-being/Lifestyle theme.

Regarding Climate themes, a large part of the IRA budget is already committed and these expenses could benefit from congressional protection. However, up to $500 billion in tax credits and residential projects for New Energies could be reduced if Trump were to win. Finally, regarding the theme of Artificial Intelligence, we believe that the reform of the electrical network infrastructure could be delayed under Trump.

Our key points

We will remember from this month of October, the upward movement of interest rates partly fueled by the increase in the probability of Donald Trump's victory. While the US stock market has proven to be more resilient, few sectors have managed to maintain positive performance for the month.

The results of the US presidential election will be the determining factor for market performance next month.