Tipping point
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
The week was marked by blow-out results from the world’s leading AI-related chip maker. Seen as a bellwether for the AI boom, the company’s guidance was also strong. Together with a small number of tech-related companies, this continued to drive the S&P 500’s performance (up 1.7%[i] over the week in USD). Europe’s Stoxx 600 reached a record, helped by business surveys showing that the downturn in the euro area economy may be easing. And with a gain of 1.4%[ii] (in yen), Japan’s Topix approached highs last seen in 1989. Other Asian markets such as those in Korea and Taiwan also benefited from the enthusiasm surrounding chip makers. A decline in jobless claims for the week ending 16 February and a general reassessment of the outlook for rate cuts pushed short-term US Treasury yields modestly higher over the week. The US dollar index declined last week, while oil prices softened.
After Fed officials confirmed last week that the US central bank is in no hurry to cut rates, we will pay close attention to the release on Wednesday of core PCE data – the Fed’s preferred inflation measure – and jobless claims on Friday. We expect the first cut to come in June, and market pricing has adjusted to that timeline too, making credit investment more attractive. We prefer investment grade corporate bonds. Major equity indices are making new highs, thanks to positive earnings surprises, with the Nikkei 225 passing the record it set in 1989 before Japan’s financial bubble burst. We like Japanese equities. In China, more direct support is needed to boost confidence in the property sector even after a cut in the 5-year loan prime rate. A proposed merger between two credit card lenders shows M&A is alive again, and our theme of seeking out companies that can return money to shareholders is supported by another finance firm’s plans to do just that.
[i] Source: Pictet WM AA&MR, Thomson Reuters. Past performance, S&P 500 Composite (net 12-month return in USD): 2019, 31.5%; 2020, 18.4%; 2021, 28.7%; 2022, -18.1%; 2023, 26.3%.
[ii] Source: Pictet WM AA&MR, Thomson Reuters. Past performance, TOPIX (net 12-month return in JPY): 2019, 15.2%; 2020, 4.8%; 2021, 10.4%; 2022, -5.1%; 2023, 25.1%.
