04/15/2024

Just a few weeks ago, everything seemed very easy. Jerome Powell was ready to begin the process of lowering rates, in a "Goldilocks" economic scenario, in reference to the famous children's story. In this scenario, everything was easing, from inflationary pressures to economic growth, allowing all financial assets to perform well.<br>

Right now, after a week of geopolitical tensions and higher inflationary incidence, life is getting tougher for investors. Indeed, markets again delayed the timing of the Fed's first rate cut, while news that Israel is preparing for an unprecedented attack by Iran against government targets led the S&P 500 index to post its worst week since last October. This comes at a time when investors have accumulated a lot of exposure to risky assets in their portfolios.

A mixed start to the earnings season added to concerns, with Wells Fargo and JP Morgan missing revenue forecasts that the market had expected, although Citigroup's earnings did beat analysts' forecasts.

Similarly, the large rally in bond yields also affected confidence. Investors now expect less than two interest rate cuts by the Federal Reserve in 2024, less than the central bank itself indicates in its famous dot plot. Likewise, Goldman Sachs' team of economists lowered the expected rate cuts for 2024 from five to two, while Barclays analysts expect only one rate cut this year.

Substantially, however, the global macroeconomic scenario has not changed significantly, although risks have increased. On more than one occasion we have commented that financial markets are essentially risk discounting machines and that, after an almost vertical rise over the last five months, a correction, or at least a market consolidation, was inevitable.

All in all, the S&P 500 index closed the week with declines of around -1.5%, weighed down by the financial and health care sectors, which corrected by more than 3% in the weekly total. Conversely, although no sector was able to close the week higher, technology companies showed a better relative performance, as investors are confident that they will use their strong margins and fundamentals to post strong earnings growth. Similarly, the "growth" investment style clearly outperformed "value" in the last week. In Europe, the stock markets closed with significant declines, although more modest than those recorded on the other side of the Atlantic. The financial and telecommunications sectors showed great weakness in the European stock market for the week, which was also highlighted by the strong performance of oil and mining companies. This explains the good week for the UK stock market, whose exposure to the commodities sector is very significant and which recorded weekly gains of more than 1%. The Japanese market experienced gains in its weekly computation and, in general, emerging Asia also managed to successfully navigate the weekly uncertainties. The MSCI world index experienced weekly declines of 1.5%, weighed down by weakness in developed countries' equity markets.

As for the week ahead, the Iranian attack on Israeli positions is having an effect. That said, the reaction of the markets seems to be quite moderate, since a reading that what we are facing is basically propagandistic in value is gaining strength. Iran's statement that the episode is over if Israel does not respond to the attack would add weight to this interpretation.

So far, it is known that both Israel and its main allies, the United Kingdom, the United States and some sources suggest that Saudi Arabia and Lebanon also contributed to shooting down the vast majority of the drones and missiles launched against Israeli territory. The projectiles that detonated caused minimal material damage and no casualties were reported. Practically the entire international community has condemned the Iranian attack.

Among the financial markets, bitcoin suffered a significant drop in Saturday's session, although it has been recovering since then. The Israeli stock market, which opened on Sunday, closed down -0.65%. As for the European markets, Monday's session ended with gains of around +0.5% and the North American market evolved more conditioned by macroeconomic references than by the geopolitical scenario, with strong retail sales data for the month of March acting as the trigger to activate sales on Wall Street.

Of course, the risk of escalation of the conflict has increased significantly, although diplomatic efforts, with the United States in the lead, will focus on containing the Israeli military response and avoiding an extension of the conflict that could have very negative consequences for world economic activity. In this regard, the G-7 leaders will meet at Sunday's session, while Israel will convene the war cabinet.

We will have to keep a close eye on developments in the coming hours, in case it is necessary to make any changes in our portfolios, which, of course, will always be aimed at protecting our clients' assets in the best possible way.