The first quarter is gone: January has been characterized by a pure sense of excitement on the expectation of Trump fiscal reform, followed by stormy and volatile trading sessions due to some concerns regarding the higher yield environment and the need of extra regulation for some big Nasdaq players.
All in all, the rally that the Oil has experienced so far, helped global indexes to find some support thanks to the energy sector. Again, we have been in front of a great sector rotation; for instance, the lagging utilities partially recuperated what they lost at the beginning of the year, mainly explained by the behavior of the US 10yr that firstly approached the psychological level of 3% and then turned back to 2.75%.
What should we expect from now on? We still have in mind the calm waters that defined the entire 2017. But since January, the US market has been more volatile, i.e. the S&P500 closed at more than +1% or -1% 24 times YTD. Hence, the perceived volatility of the equity is increasing, and the equity indexes are not resilient anymore even if macro data continued to support the growth and results from companies confirmed the good health of US companies. However, the narrative has changed and market participants are unexpectedly weighting negative news with more emphasis. On top of it, suddenly the entire world realized that Trump protectionist campaign could be a real event, spurring waves of isolation responses from other countries.
It is like we have been blind all this time. Another example that attain a single story is Facebook. The social network giant is accused of inappropriately using our identity, our data. But this is true by definition, since we are opening a new account, we freely decide to sell part of our life to a big eye. It is its core business. FB profits are coming from advertising thanks to its enormous database.
Now we realized that our privacy is at risk and we demand for more regulation. On the other hand, Trump himself declared a war against the supremacy of Amazon. But if this is the real risk, we could absurdly find in a position to evaluate some tech companies as utilities when their business will be impacted by margin and profits capped by a regulator. Current multipliers are discounting a different scenario, and this explain latest selloff occurred during last few days of March. Not only, we should not forget how crowded is the FAANG trade. The most precious advice we have provided during last few months was to avoid crowded trades. We will repeat ourselves by saying that in this environment cash is the real king and that the asset class that is still trading in an overvalued territory is the high yield. In fact, corporate bonds yields widened from the beginning of the year but still appear reluctant to fully pricing a different scenario. They could suffer either higher yields for a repricing of government curves (an argument that lost part of its tenor meanwhile) or a deterioration of financial and economic conditions.
The investment grade is potentially set up for a repricing too, since the CDX investment grade index of credit defaults swaps has jumped only 21bps from lows registered in January, a level that we saw a year ago, but well below the peak of early 2016.
Christian Zorico: LinkedIn Profile