The main market-moving event of the month has been the conflict between Hamas and Israel, which continues to evolve in an increasingly violent manner. Our thoughts go out to the victims, and we hope that weapons will be put down soon. As much as this preamble may make it seem frivolous to talk about markets and investments, our role as fund managers requires us to do so, and in this commentary, we will try to understand the market’s reaction to this conflict and what to expect in the coming months.
For the moment, the war has certainly increased market volatility, leading to poor performance for risky assets in general, with global stocks down 2.3% (in dollars). Even bonds have suffered, with the 10-year US bond yield dropping by 1.7%, partly due to stagflation fears related to the conflict and partly due to the upward pressure on interest rates generated by the overall macroeconomic context.
In the United States, growth has remained extraordinarily high, with quarter-on-quarter annualised real GDP above expectations at 4.9%, which has likely contributed to the 30 basis point increase in the ten-year yield. In Europe, on the other hand, many countries appear to be on the brink of a recession, and inflation has shown positive signs, but concerns about the financial stability of some high-debt countries (Italy in particular) are keeping pressure high on interest rates. Meanwhile, there is good news as some risks from the previous month have diminished, with the majority of American automotive workers reaching an agreement with major companies, and the Republicans finally managing to elect a new Speaker.
Overall, the geopolitical situation remains precarious and, in our opinion, will be the focus in the coming weeks. Keep an eye on the political situation in the USA, where the new Speaker must quickly reach an agreement with the Democrats to avoid a government impasse, and on the initial results of the earnings season, which will be crucial to understand whether the stock market, particularly in the United States, is overvalued.
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