Top of the Morning: CIO Strategy Snapshot - Where do we go from here?
The desk is cautiously optimistic following a recent uptick in market performance, as global equities rebounded after a prolonged downturn. Per the full note from UBS, last week saw the S&P 500 rise by 1.6%, indicating a potential turning point despite ongoing geopolitical tensions, notably the escalating U.S.-Iran conflict. This positive market sentiment is underscored by a decline in the VIX, dropping from around 30 to approximately 25 during the week, suggesting reduced market fear. As traders assess the shifting fundamentals, the market seems to be looking for stability and direction amid these uncertainties.
What the desk is arguing
The desk posits that investor sentiment is stabilizing, which may encourage risk-on positioning after last week's positive performance. With equities showing signs of recovery and volatility decreasing, there may be opportunities to capitalize on this momentum in the FX market.
Supporting this view is the S&P 500's recovery from its low with an increase of 1.6%, while European markets outperformed U.S. stocks, confirming global recovery trends. The desk notes a significant drop in the VIX index from 30 to 25, highlighting a decrease in market anxiety and suggesting a more favorable environment for risk assets.
Where it sits in our coverage
Our consensus target for the EUR/USD pair sits at 1.075, with a range between 1.04 and 1.12. Notable firms in our coverage include: - jpmorgan: 1.10 - bofa: 1.04 - goldman: 1.08
This view appears to align with jpmorgan, which is positioned in favor of a stronger USD against the EUR, while bofa takes a more cautious stance at the lower end of the range aiming for a more defensive outlook.
How other firms see it
Many firms mirror the desk's sentiment with a bullish perspective on the U.S. dollar, particularly firms like jpmorgan and goldman that are aligned with an upward trajectory for USD cross rates. Meanwhile, bofa and other cautious firms suggest potential headwinds that could limit this recovery.
Traders should closely monitor eurozone economic indicators, particularly those influencing ECB policy, as they may significantly impact the EUR/USD dynamics going forward.
01Equity markets are showing signs of recovery after a month-long downturn.
02The VIX index has declined, indicating reduced market anxiety.
03Potential opportunities in FX markets as stabilization may encourage risk-taking.
04Continued geopolitical tensions must be monitored as they could impact market performance.
Market implications
Traders should watch for a potential breakout in the S&P 500, which could signal further risk appetite. Pay attention to the EUR/USD and monitor key economic releases from the eurozone that might affect the cross rate's trajectory this week.
Risks to this view
If geopolitical tensions escalate further leading to an alarming spike in the VIX, or if economic data from the eurozone comes in much weaker than expected, the current bullish sentiment could reverse quickly, destabilizing the risk-reward balance.
ubs
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. Coming off of a holiday shortened week that experienced the first positive market performance in over a month, but with further risk of escalation in the U.S.-Iran war, the question that investors are going to ask at the start of a new week is, where do we go from here?
So joining us here on this Monday morning to try and answer that very question, glad to welcome back Head of Asset Allocation for the Americas with the UBS Chief Investment Office Jason Trejo. Jason, welcome back. Hope you enjoyed a nice holiday weekend.
And thank you for spending some time with our listeners to begin another week. Hey, good morning, Dan. Happy Monday.
Yes, it's back after a shortened week. And I know our colleagues elsewhere around the world, some of them are still off, so still not fully back globally this week. Jason, at the start of this week, we can point to market stabilization last week, and that was good to see.
What exactly happened? And more importantly, why did it happen? Well, let's just take a quick summary of market performance across different asset classes.
We saw a bounce back in equities within the U.S. The S&P 500 rose 1.6% on the week, again, it was a shortened week because Friday was off. It is now down 4.3% from its February 27th level, right before the conflict began.
This was led by large cap growth, a little bit more economically sensitive sectors, but also more secular growth. Like I said, it means we're also up around 4%. If we look outside of the U.S., European equities, as an example, were up even more, with the Euro stocks index up 2.3%, German equities up 2.5%.
So a bounce back in equities globally. This corresponded to a decline in the VIX volatility index, the market fear gauge. It was lower 30 as the week began, and then it fell to around 25 by the end of the week.
It's chopping around a little bit, but a decline there. On other markets, fixed income, we saw yields across the entire Treasury curve go lower, about 12 basis points for the 2-year, 11 basis points for the 10-year, and then market pricing for Fed expectations further went from pricing in hikes to, at some point even last week, again, pricing in cuts as the week went on. This led to a 7% or contributed to a 7% jump in gold last week.
As rates have gone up, gold has sort of moved inversely, and now as rates go lower, you see gold bouncing back. And on currencies, the dollar was up very slightly, so still consistent with kind of a risk-off flow, but not as much as the other markets moved. The other key thing, and this is sort of perhaps driving all of this, is if we look at oil prices and not spot oil prices, which continue to go higher, because ultimately a lot of the oil markets, energy markets, are spot markets, meaning they have to kind of clear right now, as opposed to equities are sort of discounting of future earnings.
But if we look at where the forward curve is pricing for oil, especially in the U.S., WTI is 6 to 24 months out, it was down about $3 to $5 last week. So near-term stress, but the view is that ultimately this is going to lead to lower prices later on, at least relative to where we were the prior week. So still high, but the direction of travel is positive.
So you sum it all up, it was a positive market story last week. Risk assets go higher, interest rates go lower, future oil prices go lower overall. You know, why did this happen?
Well, we saw when we talked last week, you know, President Trump had further delayed until April 6th, you know, some actions on attacking missiles on Iranian power facilities. He also made some comments earlier last week regarding, well, you know, this will all be over, you know, very soon, the job is almost done. You know, by the middle of the week, you know, when he gave his press conference on Thursday, the market reaction was a little less favorable.
It seemed like not necessarily clear and in sight. Yet here we are on Monday morning, there's some other signs that suggest efforts are being made to try and, you know, bring this conflict towards an end. There is a UN resolution to open the Strait of Hormuz, there are 40 different nations meeting with the same goal.
You know, there's Iran-Oman negotiations about the Strait of Hormuz access, and more apparent involvement of European and Chinese officials to try and all bring this to at least a ceasefire. And again, there's reports this morning that some allies, such as Turkey, Pakistan are also pushing for a 45-day ceasefire that would ultimately lead to an end of the conflict. So it is still a very fluid situation, because we also saw the president, you know, tweet out over the weekend that if Iran does open the Strait, he will launch attacks.
So very fluid situation. But if I were to look at what's kind of going on overall, what the market reacted to last week is, it's sort of reducing a little bit the downside risks of oil spiking to $350 a barrel and to the standard for a period of time. So a little bit less downside risk means the markets can react sort of favorably.
And that's what we saw last week. Now, Jason, if we focus in on the macroeconomic environment, reflecting on last week, we did receive important March economic data, including the payrolls report on Friday. Markets in the U.S., of course, were closed.
What's the takeaway from the latest jobs data? Well, if we just look at the overall data, because we also got the ISM manufacturing index and some other data, it's still showing an economy through the data we have. A lot of this will be surveyed based off of like, you know, mid-March, so not the most current.
It's showing an economy that is, you know, well played, resilient, you know, GDP tracking for Q1 is still most definite to be, you know, two and a half to three percent, ignoring the Atlanta Fed, which is lower because it's being distorted by, you know, some trade data. So that's positive. Some of these surprise indices still suggested the data was a little bit better than expected last week.
And that culminated with the payrolls data that we did get on Friday. So the, you know, the headline number, the payrolls, non-farm payrolls number, well, rose $178,000 in March, where the consensus forecast was $65,000. Now, there was definitely some payback in that headline number.
You know, some of it was weather, because in February, it was quite cold. During that time period in March, the weather was better, and that may have added upwards of, you know, 60,000 jobs. There was also a payback from strikes that lowered the payroll growth in February.
Like, these are within the healthcare field, they could have taken away $30,000 in February, added $30,000 in March. So given a lot of volatility in the month-to-month numbers for payrolls, if we look at the three-month moving average of private sector payroll growth, it rebounded sharply. It was $15,000 through the February data, it's back up to $79,000 through the March data.
And this is comfortably above what most estimates would say, like, how many jobs do we need to be creating in a month to maintain the unemployment rate at a stable level? That's sort of the break-even job growth. So the latest data suggests we're at least at that level, it's not above.
All that matters, you know, because the Fed's, you know, research suggests that all we need to have sort of stable unemployment is, you know, upwards of maybe 10,000 new jobs per month. Other parts of the payroll data also encouraging, which is the unemployment rate, this is perhaps the most critical signal when you consider, like, the labor market supply story, and also for what the Fed will really kind of be gauged on, focused on, if they make policy decisions. The unemployment rate fell 18 basis points to 4.26%, and the three-month average was more than about a tenth of a percent below its November high.
So the unemployment rate kind of reinforces the message that the labor market is stabilizing. The weather details in the report are a little bit less encouraging and more mixed. For example, they declined the participation rate, exaggerated the improvement of the unemployment rate, average weekly hours worked, it's done a little bit lower, and wage growth has decelerated.
So it's not a great story for the labor market, but it is consistent with if you kind of take an average over the past four or five months, that there does seem to be some stabilization if there was a clear trend of softening last year. So that's from the positive, you know, development. This week, the big focus will be on inflation.
The data comes out on Thursday, the, that's the ninth, the headline number is going to go up a lot because it's going to incorporate the big surge in energy and oil prices, and gas at the pump on national average is up about 35% from roughly $3 to $4. As a result, the headline inflation number, the consensus forecast is going to be 1% on a month-over-month basis. For context, it was 30 basis points for February.
So you'll see new stories on, by the end of the week, of this massive surge of inflation, which the market is already anticipating, but, you know, the question then will be how much is this built into core measures of inflation and not just headline, which, you know, normally the Fed would kind of look through. So, you know, I think that's what the key thing is, is the, to look at next week or later this week is the details of inflation and is it starting to impact the core in some way and, you know, time will tell on that, but otherwise the number is going to look shocking even if the details aren't so bad. So Jason, just taking these factors into account that you've covered with us, the state of the U.S. macroeconomic environment, you think about the fluid geopolitical landscape, taking all of this into account, what recommendations currently, Jason, do you have for investors?
Well, last week I think is a pretty good reminder that trading geopolitical risks and events is difficult because markets can move very quickly on relatively little news or significantly on actual substantive news and just looking at the price of gold up to 7% last week, equities, especially on Tuesday and Wednesday, you know, up combined in the U.S. you know, for 4%. So you can get these significant moves very quickly, which also then is a reason why you want to stay invested and not begin to kind of trade this market too significantly. The recovery in equity markets outside of the U.S. or the bounce back I mentioned, you know, in Europe, in equities is going to remind you that you want to be diversified globally and not be sort of too concentrated because other parts of the world have been hit even harder than the U.S. during this conflict and likewise, if the situation sort of stabilizes in the near term, then the bounce back, especially for EM or Asian equities, could be very sharp.
Again, we saw that last week with some mid-single digit type of returns for some of the Asian equity markets. Overall, our view on the U.S. economy on equity markets remains kind of constructive on a six to nine month view, but acknowledge that look, in the near term, it's very fluid and we may have more downside versus upside in the very near term. But ultimately, you know, we do believe that the situation will start to deescalate by the end of the month.
Oil will start to kind of increase in its flows through the Straits by the end of the month. And look, that doesn't mean oil prices will come down quickly. They could stay elevated for a long period of time.
But what it does mean from a market perspective is that those downside risks start to recede quite a bit. And if that's the case, when investors start to look at the economic fundamentals, the earning fundamentals, you start to see more upside, which is why we have still this kind of constructive view on a, you know, let's call it six to 12 month view. If you look at their fixed or other asset classes, like in fixed income, you know, rates dropped last week.
We've had the view that the front end of the Treasury curve at the two-year point roughly was pricing in too much in terms of Fed hikes. We still believe the Fed is going to cut this year twice, September and December. As that happens, yields go lower, especially the front end.
So that's where if you want to have exposure to interest rates, especially, you know, high quality fixed income going to the front end of the curve, the two to five-year points are our desired area. The 10-year did decline 11 basis points, and it is kind of getting close to the midpoint of the range that we've had for a while, which is like around four to four and a half percent. But, you know, the next couple of days, depending on what happens with the price of oil, the 10-year could easily shoot back up over to 4.4, or close to 4.5 percent.
So we'll be cautious on taking, you know, a lot of interest rate risk exposure at this time and maintaining a tilt towards kind of high quality fixed income in general. And then gold, you know, we've been so advocated, it still can be a good, you know, kind of diversifier in portfolios. And while it was struggling earlier in this conflict last week, it's bouncing back, kind of suggests that, again, as rates go lower, it should benefit.
And also as, you know, things stabilize, some of the technical flows may be sort of reducing exposure to gold. That happened in the past few weeks as investors sort of monetized, you know, the significant gains they would have had. They'll return to being kind of buyers, you know, which will provide gold, you know, support to gold to move higher to your end as well.
So, you know, bottom line is a lot of the key views that we've had, you know, for the past few weeks, those are maintained. And last week's price action sort of validated some of those views. Well, Jason, very helpful touch base.
Thank you for dropping by on this Monday morning to keep our listeners informed on CIO's thinking when it comes to the current geopolitical landscape, the macroeconomic environment, how it all translates to market action and guidance when it comes to positioning one's portfolio. So thank you again for joining us today, Jason, and look forward to picking back up with our conversation again next week. You're welcome.
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