Powell: “The Time Has Come for policy to adjust”

  |   For  |  0 Comentarios

Federal Reserve Chairman Jerome Powell announced this Friday at the Jackson Hole symposium that the time for monetary policy tightening has arrived, but the pace will depend on macroeconomic data.

“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” Powell said according to the speech published by the Fed.

The head of the federal monetary authority reviewed the evolution of the country’s macroeconomic situation since the pandemic and assured that the Fed will do “everything in our power to support a strong labor market while continuing to make progress toward price stability.”

With appropriate moderation in monetary policy, “there are good reasons to believe that the economy will return to 2% inflation,” he said. Powell also emphasized the importance of maintaining the strength of the labor market at the same time.

“The current level of our official interest rate gives us ample room to respond to any risks we may face, including the risk of further unwanted weakening of labor market conditions,” he explained.

At the 2024 annual symposium entitled “Reassessing the Effectiveness and Transmission of Monetary Policy”, the president addressed the presidents of the Fed’s divisions in each state. He provided explanations as to why the measures implemented in recent years, including rate hikes to control rising prices, had been taken.

In this regard, Powell analyzed the behavior of inflation from the peak during the pandemic to the current decline.

The onset of the pandemic quickly led to shutdowns in economies around the world, which meant a time of radical uncertainty and severe downside risks. Additionally, the Fed chairman recalled the government and congressional assistance, such as the passing of the CARES Act.

“At the Fed, we used our powers in unprecedented ways to stabilize the financial system and help prevent an economic depression,” he emphasized.

However, Powell assured that pent-up demand, stimulus policies, pandemic-related changes in work and leisure practices, and additional savings associated with restricted service spending contributed to a historic increase in consumer spending on goods.

“That’s how inflation arrived. After being below target throughout 2020, inflation surged in March and April 2021. The initial inflation burst was concentrated rather than widespread, with extremely large price increases for scarce goods like motor vehicles,” he asserted, later insisting that this situation indicated a transitory inflation regime.

“The Transitory Inflation ship was full, with most analysts and central bankers from advanced economies on board. The common expectation was that supply conditions would improve reasonably quickly, that the rapid recovery in demand would run its course, and that demand would rotate from goods to services, reducing inflation,” he commented.

However, in June 2022, inflation reached its peak of 7.1 percent, forcing the Fed into a rate hike rally throughout 2023 and part of this year.

After this review, Powell concluded by assuring that “the pandemic economy has proven to be unlike any other, and much remains to be learned from this extraordinary period.”

Financial Advisors Need More Technology Training and Support

  |   For  |  0 Comentarios

Managing technological needs remains one of the biggest challenges for advisors, according to the latest Cerulli Edge-The Americas Asset and Wealth Management Edition.

According to the research, the most frequently identified challenges in using technology include compliance restrictions that limit functionality or impose other limitations on advisors’ ability to use technology (73%), followed by a lack of integration between tools/applications (71%), and a lack of time to learn and implement (70%).

Since the COVID-19 pandemic, advisors have significantly increased their use of technology. While adoption has proven to be a boon for practices that have incorporated these types of tools, the industry still has a long way to go, the report notes.

Additionally, there is an opportunity for central offices and fintech companies to strengthen the training and support they offer.

“Many of the challenges advisors identify in using technology are challenges that can be overcome through knowledge-sharing efforts to educate and inform advisors about the potential power of more effectively leveraging the technology tools they already have at their disposal,” says Michael Rose, director.

However, according to the study, only half of the advisors are satisfied with the training and support they receive. More structured advisors, who can better leverage specialized technology and offer more comprehensive services to their clients, represent one of the most important market segments for software providers, brokers, and custodians, who are the primary technology providers for these advisors.

“Given the great importance that advisors place on the technology at their disposal, it is crucial that brokers/dealers, custodians, turnkey asset management providers, and other companies that provide technology platforms to advisors obtain sufficient and ongoing feedback to ensure that the technology stack they offer remains aligned with the evolving needs of the practices they serve,” concludes Rose.

 

Jackson Hole: More Focus on Monetary Policy Tools than on Interest Rates

  |   For  |  0 Comentarios

Central banks are taking a break from their respective monetary policy meetings in August, but the markets are not entirely devoid of news related to the activities of these institutions. The Jackson Hole Central Bankers Symposium (Wyoming, United States) is the summer’s key event to observe potential decisions in the meetings scheduled for the remainder of the year.

From Thursday, August 22 through Saturday, August 24, senior central bank officials from around the world will share their views on the state of the economy. A significant part of the market is also waiting for clues about the next steps in interest rates.

The main event will take place on Friday, with the appearance of U.S. Federal Reserve Chairman Jerome Powell. All eyes are on him, considering that the U.S. monetary authority has yet to lower interest rates like other institutions.

Bank of America notes that Fed chairs “tend to keep a low profile at Jackson Hole” and that the easiest course for Powell “would be to repeat his July message.” The firm has reasons to believe this will be the case this time, as last week’s economic data delivered a “clear” message: inflation is low enough for the Fed to start cutting, but not so low as to focus solely on its employment mandate. “We remain convinced that the Fed will cut twice this year, in September and December,” the firm asserts, adding that a shift in language from July “would suggest that the committee is ‘very close’ or ‘close’ to the point where monetary policy easing is likely.”

Meanwhile, George Curtis, Portfolio Manager at Vontobel, points out that the data known so far “points to a slowing economy, but one that is still growing,” and expects Powell to highlight this on Friday. “We don’t believe he will rule out a 50 basis point cut, especially considering that another labor report will be released before the September meeting,” he says, but admits that his baseline scenario remains a 25 basis point cut.

There could also be market reactions, as Federal Reserve officials have not changed their tone since the weak non-farm payroll data that triggered mass selling. “There’s a possibility that equities could continue to retreat to mid-July levels.” The S&P 500 equity index has erased its losses for the month, and credit spreads have almost done the same. However, government bond yields remain near their monthly lows, so “either Powell validates this more bearish view, or government bonds will give back some of their recent gains,” Curtis asserts.

David Kohl, Chief Economist at Julius Baer, does not expect many clues at this meeting either. He anticipates that this year’s symposium will offer fewer insights into the path of interest rates and focus more on the appropriate tools for monetary policy. “The return to the trade-off between price stability and maximum employment makes the arguments for cutting rates much clearer, as long as inflation is falling and unemployment is rising,” argues Kohl, who notes that recent positive economic data supports a gradual reduction in interest rates.

The expert points to the event’s title – “Reevaluating the Effectiveness and Transmission of Monetary Policy” – to infer that there will be a debate on the appropriate tools for guiding monetary policy. “This includes the appropriate interest rate, the level or range of inflation, and the amount of liquidity the Federal Reserve wants to provide to financial markets,” he explains.

At the same time, Kohl does not expect much in terms of what is most interesting for financial markets: the trajectory of official interest rates in the coming months. “We expect the scope and pace of monetary easing to depend more on economic data than on the fundamental issue of monetary policy debated at the symposium,” says the expert, who, on the other hand, sees “much clearer” arguments in favor of cutting rates now that falling inflation is accompanied by rising unemployment. Kohl anticipates a 25 basis point cut at each of the upcoming FOMC meetings through the end of the year.

For James McCann, Deputy Chief Economist at abrdn, Powell’s speech at Jackson Hole could signal “that rate cuts are on the horizon, but the speed and extent of the easing remain uncertain.” Given the current moderation in inflation and the cracks appearing in the labor market, the Federal Reserve may prioritize attempting a soft landing by reducing the restrictive nature of monetary policy, according to McCann. He believes it is likely that Powell will indicate the start of an ongoing easing cycle, “setting the stage for rate cuts at each of this year’s remaining meetings.” And while he acknowledges that the good news for the Federal Reserve is that last week’s data from the U.S. confirms that the economy is not heading for an imminent recession, he also notes that U.S. monetary policymakers will have a better perspective on the recent health of the labor market when the Quarterly Census of Employment and Wages benchmark revisions are released this week.

Jean-Paul van Oudheusden, market analyst at eToro, is also aware that these speeches at Jackson Hole have “sometimes” hinted at significant changes in monetary policies. In this case, he expects Powell to highlight the success in controlling inflation and prepare markets for a potential rate cut in September in a speech where he will not take questions. “Although speculation about a 50 basis point cut has increased, July’s CPI data – which largely met expectations – does not currently support an adjustment of such magnitude,” the expert explains, adding that the actual magnitude of the rate cut “will likely depend on August’s labor market data, which will be released in two weeks.”

Guy Stear, Head of Developed Markets Strategy at Amundi Investment Institute, is convinced that the Fed will cut rates three times before the end of the year and could suggest as much at the Jackson Hole symposium. “We expect the Fed to cut rates by 75 basis points between now and the end of the year, with successive 25 basis point cuts at each Fed meeting, and we expect its chairman to continue signaling that the first rate cut is planned for September,” argues Stear.

However, the expert does not rule out the possibility that investors might be disappointed by comments referencing the stickiness of inflation. “If the U.S. two-year yield were to rise back to 4.2%, from its current 4.05%, it would be a good opportunity to increase long positions at the front of the U.S. curve,” he concludes.

ECB

Although Powell will be in the spotlight, ECB President Christine Lagarde will also command market attention. This is the view of Martin Wolburg, senior economist at Generali AM – part of the Generali Investments ecosystem – who expects a rate cut from the European monetary authority, in line with what the Federal Reserve might do.

“The ECB made no changes at its June meeting, as expected. However, the Governing Council considered that the inflation outlook was in line with its forecasts, and the rhetoric on wage growth seemed less concerning in June,” explains Wolburg, who also recalls that at that time, Lagarde herself stated that “what we do in September is totally open.” The expert is aware that July’s inflation data clearly provides some ammunition to the “hawks,” but he expects the “reduction” process to continue, with quarterly cuts in official interest rates of 25 basis points, “until the deposit rate reaches 2.5%.”

China Leads the “Brand Value” of Banking Entities Worldwide

  |   For  |  0 Comentarios

The total brand value of the world’s top 500 banks has doubled in a decade, according to the latest edition of the Brand Finance Banking 500 2024 ranking. The combined value of the 500 most valuable banking brands in the world has reached a record high of €1.35 trillion ($1.44 trillion), nearly double what it was a decade ago, according to Brand Finance’s sector report.

Notably, China dominates this ranking, with its entities occupying the top four positions: ICBC, China Construction Bank, Agricultural Bank of China, and Bank of China. The report indicates that Chinese banking brands have appreciated in value, retained the top four positions, and increased their brand value.

“The Chinese banking sector shows remarkable recovery, with the four major banks far ahead of their U.S. counterparts. ICBC (Industrial and Commercial Bank of China) remains the most valuable banking brand in the world for the eighth consecutive year, with a brand value of €67 billion. China Construction Bank, Agricultural Bank of China, and Bank of China occupy the second, third, and fourth positions, respectively,” the report states.

Another trend evident in the evolution of this ranking is that local banking brands prove to be stronger than global ones: BCA, from Indonesia, stands as the strongest banking brand in the world, and regional African operators score high in brand strength. In contrast, the brand value of Russian banks continues to plummet.

For U.S. banks, it is notable that they have experienced a slight decline of 6.6% in terms of brand value. Despite this, Bank of America retains the title of the leading U.S. banking brand for the fourth consecutive year, ranking fifth overall with a value of €34.8 billion. Meanwhile, Wells Fargo, which ranks sixth overall, has narrowed the gap with its U.S. competitor, with a 5% increase, reaching a brand value of €33.4 billion.

Commenting on these results, David Haigh, Chairman and CEO of Brand Finance, stated: “As the world’s leading banking brands reach new heights, Chinese megabanks continue to dominate at the top of the brand value ranking. Another key finding from our market study is that local banks are increasingly eclipsing their larger counterparts in brand strength. Dominant brands thrive in unique markets with limited competition, while banks that expand into multiple markets can successfully increase their brand value but risk diluting their strength.”

Regarding these trends, Brand Finance’s market study indicates that local and regional banks are performing as well as, and in many cases better than, banks with a global presence in terms of positioning their brand in the hearts and minds of customers.

For example, BCA of Indonesia is the strongest banking brand in the world, with a score of 93.8/100 in the Brand Strength Index (BSI) and an elite AAA+ rating. Three African brands, Equity Bank, First National Bank, and Kenya Commercial Bank, along with Romania’s Banca Transylvania, are among the five strongest brands in the world, all with AAA+ ratings.

Finally, regarding movements within the ranking, only 11 of the top 50 countries experienced declines in aggregate value, led by Russia (69%), Nigeria (28%), and Malaysia (20%). “As expected due to the international sanctions imposed on Russia, the country’s two largest brands—Sber and VTB—are at the forefront of those that have seen the largest percentage drops in brand value, with declines of 64% and 91%, respectively,” the report notes.

Possible Scenarios for the Upcoming U.S. Elections and Their Implications

  |   For  |  0 Comentarios

At the start of the year, one of the most frequently analyzed topics was the volatility that the U.S. elections could bring to the market. However, what was not anticipated was the volatility stemming from the candidates themselves.

The dynamics of the U.S. elections have been altered by President Joe Biden’s resignation and the entry of Vice President Kamala Harris, leading to a new electoral probability landscape.

In this context, UBS Global Wealth Management has adjusted its probabilities for the possible scenarios.

According to a report shared on LinkedIn by Solita Marcelli, Chief Investment Officer Americas, Harris has a 40% chance of winning the Presidency with a divided Congress. On the other hand, UBS warns that the probability of a possible Trump red sweep has decreased from 40% to 35%.

Harris remains below Trump in the likelihood of winning with majorities in both chambers, but the trend is positive, rising from 10% to 15%.

Lastly, the possibility of Trump winning with a divided Congress has dropped to 10%.

According to UBS, if Harris wins with a divided Congress, there will be limited changes in policies, and thus, a more moderate impact on financial markets.

Additionally, policy enacted through executive action and regulatory oversight will continue significantly, although recent Supreme Court decisions are likely to reduce the Executive Branch’s agencies’ ability to interpret federal statutes. Support initiatives for green energy, efficiency, and electric vehicles are expected.

On the other hand, if Trump wins with majorities in both chambers, UBS expects the extension of the 2017 tax cuts, with a potential further reduction in corporate tax rates. The funding for these projects might come from cutting the green energy provisions in the Inflation Reduction Act.

According to the report led by Marcelli, stock markets would applaud lighter regulation and lower taxes, but this could be partially offset by concerns about the costs and inflationary impact of higher tariffs and trade wars.

The Dutch bank ING presented three possible outcomes for the U.S. elections and analyzed the implications from four perspectives: domestic policy, foreign policy, trade policy, and monetary policy.

The first scenario is the “red sweep” with Trump as president and Republicans winning both chambers.

Domestic Policy: Expanding the 2017 tax cuts as a priority. New immigration controls. No significant fiscal consolidation.

Foreign Policy: Less support for Ukraine and Taiwan. Trump focuses on domestic growth and employment.

Trade Policy: Tariffs, with China particularly exposed. Implementation might be delayed as initial focus is on domestic policy.

Fed Policy: A loose fiscal policy is likely to be accompanied by more restrictive monetary policy if the Fed takes its 2% inflation target seriously.

The second possible outcome is Trump as president but with a Democratic Senate.

Domestic Policy: Trump could extend the 2017 tax cuts, but Democrats might block new cuts and spending priorities.

Foreign Policy: The domestic agenda is limited, so a greater emphasis on foreign policy is likely, with Trump seeking a deal with Russia over Ukraine.

Trade Policy: Trade protectionism is faster and tougher as Trump seeks to leverage actions he believes will boost the U.S. economy.

Fed Policy: Persistent inflationary fears from tariffs and extended tax cuts might make the Fed wary of cutting rates too much in 2025.

Finally, ING estimates the possibility of Harris as president with Republicans dominating the House of Representatives.

Domestic Policy: Increased taxes for businesses and the wealthy, but tax credits and spending in other areas suggest modest fiscal consolidation.

Foreign Policy: Continued support for Ukraine, but funding is restricted by Republican opposition. Middle East tensions persist, and Taiwan maintains U.S. support.

Trade Policy: A more “carrot” approach of incentives for offshoring rather than Trump’s “stick” of tariffs.

Fed Policy: The Fed feels more compelled to bolster the U.S. economy given the reduced fiscal support.

Is it Worth Investing a Trillion Dollars in Generative Artificial Intelligence?

  |   For  |  0 Comentarios

Wikimedia Commons

In the coming years, nearly a trillion dollars is expected to be invested in generative artificial intelligence, but is it worth it?

To understand where the industry is headed, Brook Dane and Sung Cho, portfolio managers from Goldman Sachs Asset Management’s Fundamental Equity team, met with executives from 20 leading technology companies driving innovation in artificial intelligence.

There are risks. Only a handful of companies can compete in the development of large-scale, general-purpose language models. It could become a market where the winner takes all, with significant losses for companies that fall behind, even after massive investment. The applications that justify the enormous amount of spending have yet to fully emerge. For now, AI competition is largely concentrated among a few large companies with substantial resources.

However, the team sees signs that industry-specific and vertical models may emerge, leading to a broader range of winners in the AI arms race. Conversations with leading tech companies indicate that some executives are already seeing a return on their AI hardware investments. And a new generation of products from chip manufacturers is beginning to enter the market, which could mean a wider range of beneficiaries in the semiconductor industry from the AI wave.

Click here to access the full Goldman Sachs report.

OCC Welcomes MIAX Sapphire as Newest Options Exchange

  |   For  |  0 Comentarios

Captación de capital de Dynasty Financial
Pixabay CC0 Public Domain

The Options Clearing Corporation (OCC) announced that MIAX Sapphire, has become an OCC participant exchange.

MIAX Sapphire, owned by parent holding company Miami International Holdings, launched operation of the MIAX Sapphire electronic exchange on August 12, 2024.

MIAX Sapphire is MIAX’s fourth U.S. listed options exchange. With the addition of MIAX Sapphire, OCC now provides clearing and settlement services to 21 exchanges and trading platforms for options, futures and securities lending transactions.

“OCC congratulates MIH on the launch of its fourth listed options exchange,” said Andrej Bolkovic, OCC Chief Executive Officer. “As the central counterparty clearinghouse for all U.S. listed options, we are pleased to offer our clearing and settlement capabilities to MIAX Sapphire and to support the exchange-traded options industry’s continued growth.”

“The launch of MIAX Sapphire provides our members, liquidity providers and market makers with a new exchange designed to meet their evolving demands for improved access to options liquidity,” said Thomas P. Gallagher, Chairman and Chief Executive Officer of MIH. “The launch of our fourth U.S. options exchange provides our market participants with access to 100% of the multi-listed options market, all supported by our proprietary technology designed to enhance liquidity and promote improved price discovery.”

The Market Expects, and Almost Demands, a Rate Cut at Jackson Hole

  |   For  |  0 Comentarios

Photo courtesyJackson Hole | Copyright: Fed

The Fed is preparing its new Jackson Hole symposium with the market expecting, and almost demanding, a rate cut. It’s been 14 months since rates have been stationary, despite the drop in inflation.

The monetary authority will begin its annual monetary policy meeting next Thursday, August 22, titled Reassessing the Effectiveness and Transmission of Monetary Policy.

With inflation data trending downward, employment figures strong, and retail sales showing no alarming signs, experts are pressuring the central bank to lower interest rates and to begin a series of rate cuts by the end of the year.

For example, a report from AIS Financial Group summarized that last week the S&P 500 rose by 3.9%, recovering the levels of late July prior to the drop in the first days of August. It has also accumulated a 16.45% increase year-to-date (YTD). In this regard, AIS states that “the market consensus sets an average target price of 5,460” for the S&P 500 by the end of 2024.

Additionally, the market’s rise was driven by the Technology (7.5%), Consumer Discretionary (5.2%), and Financial (3.2%) sectors. In this context, “the Fed is expected to start rate cuts in September, with four cuts expected by the end of the year. The data released last week and the market’s reaction confirm that recession, rather than inflation, has now become the main driver for the market,” AIS asserts.

Therefore, they recommend “being prudent, looking for defensive sectors, quality sectors with solid balance sheets to face this context,” and highlight sectors like banks, energy, healthcare, defensive consumption, and industrial.

On the other hand, the KKR report, signed by Henry H. McVey, Head of Global Macro, Dave McNellis, Co-Head of Global Macro & Asset Allocation, and Ezra Max, Associate, U.S. Macro, asserts that the Federal Reserve “will cut rates, but not recklessly.”

The experts agree with the market’s forecast of four or five cuts in the next three months, “implying at least a 50 basis points cut, which is too pessimistic for a world where GDP is approaching 3% and inflation remains above target.”

Moreover, they confirm that there have been no changes to consumer price forecasts or the Fed’s outlook of three cuts this year and six cuts in 2025.

“Regarding rate policy, we expect the Fed to cut once at each meeting from now until mid-2025, before reaching a neutral low rate of three percent,” says the KKR report.

McVey, McNellis, and Max warned that the return of the Fed’s dual mandate and the growth data – including Thursday’s retail sales data and refund requests – are becoming the most important factors for the pace of Fed easing, and this could change opinions.

“Our baseline hypothesis is a turbulent and soft landing, but a strong GDP rebound would lead us to expect a more aggressive Fed rate cut path. Therefore, the risks remain to the downside for rates and yields, and our message is that now is not the time to bet heavily on floating rates staying at the current high levels,” they explained.

David Kelly, Chief Global Strategist at J.P. Morgan Asset Management, for his part, expressed that Fed Chair Jerome Powell could be satisfied with the progress of his administration when comparing the macroeconomic figures from when he took office during the COVID-19 pandemic to now.

However, that “certain satisfaction” will lead investors to focus on how stocks will be determined, to some extent, by how the Fed evaluates the impact of monetary policy on the economy.

Chair Powell’s view, expressed at many press conferences, is that monetary policy is powerful but acts on the economy with long and variable lags. However, while this seems to coincide with empirical observation, it is unclear, in a world of instant information, why this is or should be so, Kelly added.

Regarding the most likely Fed path, the expert distinguishes between pre and post-August 4 forecasts.

In June, the Fed forecasted only a 25 basis points cut by the end of 2024 and a further 1% reduction by the end of 2025. However, on August 4, following a slight increase in unemployment benefit claims and a weak July employment report, the market widely anticipated a 1% cut by the end of 2024 and cuts exceeding 2% by the end of 2025.

“One of the reasons for this sharp shift in expectations is probably the recognition that if the Fed started cutting aggressively, it would likely continue to do so. If, for example, the Fed cut 50 basis points at its September meeting, the economy would likely be weaker, not stronger, by the time of the November meeting, which would pressure the Fed to institute new 50 basis points cuts. This is a path the Fed would clearly want to avoid, preferring to normalize rates slowly in an economy maintaining stable growth, even as inflation moves away from its 2% target,” he commented.

The Federal Reserve will take into account the data and events of this week. However, it seems likely that, in his Friday speech, Powell will try to reinforce the idea that monetary easing should be, and will be, gradual, laying the groundwork for a 25 basis points rate cut in September, with the potential for only 25 to 50 basis points in additional cuts before the end of the year, Kelly estimates.

According to the expert, this should be considered good news for investors. While active monetary policy can be quite effective in times of financial stress, such as stabilizing financial markets during the Great Financial Crisis, it has proven to be very ineffective in stimulating a slow economy or cooling a hot economy. Fortunately, outside of crisis times, the economy seems to retain the ability to heal itself – as it largely has in recent years – and this should support a further rise in stock prices and a slow drift downward in long-term interest rates, Kelly concludes.

US Equities: A Long-awaited Mean Reversion Seems Likely

  |   For  |  0 Comentarios

Pixabay CC0 Public DomainAutor: Mojca-Peter from Pixabay

U.S. equities continued to rise in July, driven by a cooler-than-expected June CPI report that sparked a rotation from big tech and growth stocks to small-cap and value stocks. While it is too early to determine if this shift will be sustained, a long-awaited mean reversion seems likely, especially after the significant gains by the “Magnificent Seven” stocks over the course of the past 18 months.

Given the numerous factors influencing the stock market outlook, such as the upcoming U.S. election and interest rate changes, perhaps investors are starting to be mindful of the current market concentration. We have previously highlighted that just seven stocks account for nearly one-third of the S&P 500’s weighting and were responsible for over 50% of the index’s calendar year’s gains. Slower economic growth, a cooling labour market, and reduced consumer spending are potential factors that could increase market volatility, potentially benefiting investors who maintain a diversified portfolio.

On July 31, the Federal Reserve kept interest rates steady for the eighth consecutive meeting and have not yet indicated if a rate cut is anticipated to happen in the next meeting in September. Fed Chair Jerome Powell reiterated that the Fed will continue to reassess conditions meeting by meeting and that they are willing to hold rates steady as long as needed. On a positive note, inflation continues to cool and has made progress toward the Fed’s 2% target. The next FOMC meeting is scheduled for September 17-18. In July, the Russell 2000 Value significantly outperformed the S&P 500, yet still lags in year-to-date performance by over 500 bps. We anticipate a favourable environment for smaller companies as post-peak rates and necessary consolidation in certain industries such as media, energy and banking should lead to a more robust year.

 

Merger Arbitrage performance in July was bolstered by deals that closed, deals that made notable progress in receiving regulatory approvals, and a general firming of deal spreads following a period of heightened volatility. Amedisys (AMED-$98.05-NASDAQ), which agreed to be acquired by United Health for $101 cash per share, agreed to divest a package of care centers owned by Amedisys and UNH to home health operator Vital Caring in an effort to assuage the U.S. Department of Justice’s concerns about geographic overlap between the companies and shares reacted positively on optimism about the deal. Following a strategic review process, trade show operator Ascential plc (ASCL LN-£5.71-London) agreed to be acquired by Informa for £5.68 cash per share, with additional proceeds from a future asset sale. We crystallized gains on Westrock Co. (WRK-NYSE), Equitrans Midstream (ETRN-NYSE), Olink Holding AB (OLK-NASDAQ), Cerevel Therapeutics (CERE-NASDAQ) and Hibbett Inc. (HIBB-NASDAQ), among others. We remain optimistic about our ability to generate absolute returns going forward, and with first half M&A activity increasing 18% to $1.5 trillion, we expect to continue finding attractive investment opportunities.

In July the convertible securities market saw breadth expand, with a long overdue rotation out of mega cap tech into small cap. This trade was beneficial to many of the companies in the convertible market. While we believe there is room for this rotation to continue over a longer time horizon, we remain focused on companies with strong underlying fundamentals where we expect the convertible to provide asymmetrical exposure over time. Additionally, after months of postponed rate cut expectations, we are starting to see some data that suggests that easing financial conditions are imminent. This led to a bid in many holdings that would benefit from a lower rate environment, particularly in the Utilities sector, where we have been increasing our holdings.

 

Opinion article by Michael Gabelli, managing director at Gabelli & Partners 

Global Polarization: The Hidden Face Behind Gold’s Record Highs

  |   For  |  0 Comentarios

Gold is now trading above $2,500 per ounce, showing signs of potentially breaking its historical highs again. Its value as a safe-haven asset shone brightly in the first weeks of August following the volatility shock experienced by the major equity markets, causing gold to rise after several downward sessions. Now that this “scare” has passed, what could continue to drive its valuation?

In the opinion of Charlotte Peuron, equity fund manager at Crédit Mutuel Asset Management, the increase in gold’s price to $2,400 per ounce has been driven by Western investors through gold ETF purchases and a more favorable financial environment for gold.

According to her outlook, given the downward trend of the dollar against other currencies and the real U.S. interest rates, the upward trend in gold is expected to continue.

“The upward trend in gold prices dates back to 2022. Three factors explain this movement: sustained demand for jewelry; investment in physical gold (coins and bars) by Asian investors; and massive purchases by central banks in emerging countries, particularly China, who wish to diversify their foreign exchange reserves and thus reduce their exposure to the U.S. dollar,” explains Peuron.

For James Luke, a commodities fund manager at Schroders, additional factors include changes in geopolitical and fiscal trends that are paving the way for sustained demand for gold, and gold miners might be poised for a significant recovery.

“Geopolitical and fiscal fragility—trends directly linked to demographic shifts and deglobalization, which, along with deglobalization, characterize the new investment paradigm that we at Schroders have dubbed the 3D Reset—combine today to forge a path toward a sustained and multifaceted global drive for gold supplies. In our view, this could trigger one of the strongest bull markets since President Nixon closed the gold window in November 1971, ending the U.S. dollar’s convertibility to gold,” he argues.

Towards a Polarized World

One of the most interesting reflections made by Luke is that the strength of gold reflects the shift towards a more polarized world. “The escalating tension between the United States and China, and the sanctions imposed on Russia following the invasion of Ukraine in 2022, have driven record gold purchases by central banks as a monetary reserve asset,” says the Schroders manager.

Currently, the $300 billion in frozen Russian reserve assets clearly demonstrate what the “weaponization” of the U.S. dollar—or in other words, the dollar’s hegemony—can truly mean. In his opinion, the massive issuance of U.S. Treasury bonds to finance endless deficits also raises questions about the sustainability of long-term debt. Furthermore, he notes that central banks—China, Singapore, and Poland, the largest in 2023—have been paying attention, although record purchases have only increased the share of gold in total reserves from 12.9% at the end of 2021 to 15.3% at the end of 2023.

“From a long-term perspective, central bank purchases clearly reflect the evolution of global geopolitical and monetary/fiscal dynamics. Between 1989 and 2007, Western central banks sold as much gold as they practically could, as after 1999 they were limited by gold agreements that central banks reached to maintain order in sales.

In that post-Berlin Wall and Soviet Union world, where U.S.-led liberal democracy was on the rise, globalization was accelerating, and U.S. debt indicators were quite quaint compared to today’s, the demonetization of gold as a reserve asset seemed entirely logical,” he explains.

However, he clarifies that the 2008 financial crisis, the introduction of quantitative easing, and emerging geopolitical tensions were enough to halt Western sales and quietly attract emerging market central banks to the gold market, averaging 400 tons annually between 2009 and 2021. According to Luke, “these are significant figures, less than 10% of annual demand, but not seismic.”

On the other hand, he warns that the more than 1,000 tons of gold—accounting for 20% of global demand—purchased by central banks in 2022 and 2023, a pace that continued in the first quarter of 2024, is potentially seismic. “It seems entirely plausible that the current tense dynamic between established and emerging powers, combined with the fiscal fragility looming not only over the reserve currency issued by the U.S. but over the entire developed economic bloc, could trigger a sustained move towards gold,” he argues.

In this context, and to put it bluntly, his main conclusion is that “the gold market is not large enough to absorb such a sustained move without prices rising significantly, especially if other global players also try to enter more or less at the same time.