In today’s briefing:
- Iron Ore Primer: Understanding The Drivers Of the Market, Ways To Play The Sector
- Iran/Israel Debrief: A Very Soft Response from Iran – No Risk of Wider War
- Hedging Risk Amidst the Escalating Israel-Iran Conflict
- Implications of Immigration on Future Fed Policy Conduct and US Equity Returns
- Steno Signals #95 – Is the Next Move a Hike?
- Portfolio Watch: The USD Wrecking Ball Is Back
- Here Comes the Sentiment Flush
- How Expensive Are U.S. Equities?
- Inflation Takes Centre Stage – QE Coming?
Iron Ore Primer: Understanding The Drivers Of the Market, Ways To Play The Sector
- We provide a comprehensive introduction to the iron ore sector, covering the drivers and a view of the commodity in the short run.
- We look at eleven listed names in the space ( from large-cap miners to the juniors deriving a vast majority of their revenues from ore) and list our favorite miners.
- We like Vale (VALE US) for its capital return in large caps, Kumba Iron Ore (KIO SJ) in midcaps, and Mount Gibson Iron (MGX AU) in junior miners.
Iran/Israel Debrief: A Very Soft Response from Iran – No Risk of Wider War
- Good morning everyone – what a dramatic night in the Middle East and what a couple of days we have in front of us.
- Just a quick update on our take on things.
- Note that this is written Sunday morning CET and that events are still unfolding.
Hedging Risk Amidst the Escalating Israel-Iran Conflict
- Tensions between Israel and Iran have escalated, potentially leading to a broader conflict involving major global powers, which could significantly impact global financial markets.
- Immediate market reactions could include a drop in global stock markets, a surge in oil prices, and increased demand for safe-haven assets like gold and the US dollar.
- Multi-Asset portfolio managers need to employ strategies such as reducing risky asset exposure, increasing investments in defensive sectors, and diversifying geographically to mitigate the conflict’s impact on investments.
Implications of Immigration on Future Fed Policy Conduct and US Equity Returns
- Stronger-Than-Expected data forced financial markets to pare expectations of Fed policy easing in 2024. Increased labour supply reduced wage inflation, allowing the Fed to contemplate policy rate reductions this year.
- Immigration can impart short-term economic benefits and assist Fed policy by acting as a safety valve against wage inflation and keeping inflationary expectations well-anchored.
- Reductions in legal immigration that curb labour supply will lower the marginal productivity of capital as well as the rate of return on equities, particularly if budget deficits remain elevated.
Steno Signals #95 – Is the Next Move a Hike?
- Before getting to the financial word, I just briefly want to reiterate that we find a de-escalation most likely between Iran and Israel after the events unfolding over the weekend.
- Our head of geopolitics, Mikkel Rosenvold, released his take earlier.
- Quote of the week: Iran’s Chief of Staff: “Our attack is over, and we do not wish to continue it, but we will respond forcefully if Israel targets our interests.
Portfolio Watch: The USD Wrecking Ball Is Back
- The USD has been on a roll since the firm US inflation report earlier in the week and we are approaching the point where European trade balances will be impacted substantially by the rally in (energy) commodities.
- Even European Nat Gas seems to be on the move and pairing that move with the broader rise in Oil and Copper leads to a likely “flip” in the Eurozone trade balance.
- When the Euro-zone trade balance shifts from positive to negative, we typically see an impact on the trend of the EUR, which is probably the last thing the ECB needs right now.
Here Comes the Sentiment Flush
- The S&P 500 violated an uptrend that began in November. The violation resolved with the index is testing initial support nearby at the 50 dma at about 5110.
- Our analysis of market internals concludes that the decline is nearly done. Sentiment is not sufficiently panicked to be contrarian bullish. Technical conditions are oversold but can become more oversold.
- We interpret these conditions as a stock market that’s undergoing final flush before an intermediate-term bottom is formed. We believe any pullback should be temporary and shallow in nature.
How Expensive Are U.S. Equities?
- Should investors worry about the elevated levels of equity valuation? The equity valuation question is a tricky one because it is only useful for investors with long time horizons.
- Equity returns depend on the evolution of other factors such as the evolution of inflationary expectations and the bond market’s term premium.
- In the short term, stock prices are elevated because of P/E expansion, but as long as earnings estimates continue to rise, downside pressure should be limited.
Inflation Takes Centre Stage – QE Coming?
- Inflationary impulses are alive and well, coming through even in “core” US data
- The Bank of Japan continues to flounder around a JPY strategy
- Are US banks attempting a back-door QE, aided by the Federal Reserve?
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