A review of global risk appetite, credit spread movements, and the evolving rate picture, with particular focus on emerging market dislocations and where Gideon sees selective opportunity.
From the original report
Selected passages from the original publication. Historical observations reflect the report's publication date, not current market advice.
1) Warsh-ed up – President Trump ended this installment of Celebrity FOMC Chair by announcing Kevin Warsh as his pick. Warsh is known to have held hawkish views in his 2006-2011 stint on the FOMC and has voiced concerns about the Fed’s balance sheet and regulatory reach. Long-end rates increased, and the US dollar surged on the news.
2) New month-new year – Market participants have long awaited a catch-up in small-cap shares and other more economically-sensitive areas. This has indeed begun to play out this year. The above FOMC-related reaction aside, the dollar has declined and metals have rallied signaling a cyclical upswing. For these trends to continue economic growth will need to stay strong while inflation continues to trend down thus avoiding rates hikes.
3) Energy rebound – Crude oil prices have bounced from their year-end lows as tensions between the US and Iran have flared up in the wake of mass protests. Supply outages, OPEC production discipline, and uncertainty regarding Venezuela have also helped. While we see the oil market as well-supplied, we are mindful that supply shocks could help reignite inflation as price spikes are emerging in AI-related goods such as memory.
Getting soft – Traditional enterprise software shares have been savaged amidst investor concern that Large Language Models (LLMs) will significantly erode the value of the pre-coded programs which businesses have leaned on for decades to automate processes. We will discuss this further in the weeks to come, as there will likely be both business model disruption and babies thrown out with the bathwater.
Regime change? – A key question regards whether a change in FOMC Chair will lead to a departure from the ample liquidity regime and the “whatever it takes” approach to market shocks and panics. It is too early to tell, but this is a risk that could necessitate holding more dry powder in portfolios to buffer against volatility and take advantage of what may be more frequent market dislocations.
For educational purposes only; not individualized investment, tax, or legal advice. Investing involves risk, including loss of principal.
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