Muzinich Weekly Market Comment: Hiding in plain sight?

April 8, 2024

In our latest round-up of developments in financial markets and economies, we consider whether the market is right to brush off several potential risks.

It was only a four-day trading week in Europe, but price action more than compensated for the loss of a trading day. While still muted by historical standards, our preferred index for volatility, the VIX, recorded its highest reading in six months.

Bond curves flattened, with the 10-year-plus part of the curve underperforming. Commodity prices pushed higher, with metals and energy prices rising more than 4%. After sliding 12% between April 2023 and February this year, commodity prices have rallied strongly in recent weeks, as Figure 1 shows. The effects of this can be seen in the FX market, with currencies of commodity producing countries in emerging markets outperforming.

Credit markets were mixed, with euro-denominated securities outperforming, while many major equity markets in the US, Japan and Europe were down over the week. Asia (ex-Japan) bucked the trend, with China, HK, India, Malaysia and Taiwan indices generating positive performance.

From soft to no landing

Market moves did not display the standard risk-off pattern. However, there were powerful dynamics in play that could explain the rise in volatility. As Jeffrey Kleintop, chief investment officer of Charles Schwab, once noted: “History shows us that the biggest risks in a typical year aren’t usually out of left field. Rather, they are often hiding in plain sight.”¹

Take interest rates. Right now, the possibility of the Federal Reserve, European Central Bank (ECB) or People’s Bank of China pivoting 180 degrees and increasing policy rates is viewed by many as a tail risk out of left field.  

However, a continued delay in the normalisation of monetary policy to neutral levels is a risk in plain sight. This is especially true in the US, where expectations of a “no landing scenario”— in which inflation hovers slightly above the Fed’s 2% target and economic growth stays robust — are gathering momentum.²

Manufacturing on the rise

The latest economic data gives credence to those expectations, as manufacturing purchasing managers’ indices (PMI) across the globe improved, indicating economic activity and trade is starting to pick up.

In China, the Caixin General Manufacturing PMI, closely associated with the health of Chinese exports, rose to 51.1 in March, its fastest pace of expansion in over a year. Meanwhile, China’s official manufacturing PMI, more linked to domestic activity, moved back into expansionary territory for the first time since September 2023, rising to 50.8 from 49.1.³

Elsewhere, US manufacturing PMI expanded for first time since Q4 2022, reaching 50.3%. This was a huge upside surprise, given the consensus was for manufacturing to remain in contraction at 48.3%. In both China and the US, improvements were driven by production and demand, with output and new orders growing.

Meanwhile, manufacturing in the Eurozone continues to contract, falling to 46.1 in March from 46.5 the previous month, but at a slower pace than expected. The overall composite PMI (reflecting manufacturing and services activity) expanded for the first time since May 2023, rising to 50.3 in March from 49.2 in February. New orders were the main factor driving this, rising from 48.6 to 50.3. In the UK, manufacturing expanded for the first time since May 2022.

Conspiracy theorists may suggest this is a “Trump effect”, with businesses front-loading inventories ahead of an anticipated further round of tariff hikes should the former US president be re-elected later this year. However, the pick-up in manufacturing PMIs is broad based, with the global aggregate now expanding (see Figure 2). This helps explain the strong week for equities in Asia, the global manufacturing hub, and rise in industrial metal prices in what was generally a risk-off week.

For central banks, the concern will be that a broad pickup in manufacturing activity, alongside robust activity in service sectors, could add to wage pressures in what is already a tight labour market. The overnight interest rate swap market has pushed out the first Fed interest-rate cut to July, with only two 25-basis point cuts fully priced in for 2024. Investors still expect the ECB to begin loosening in June and the Bank of England to follow in August.

Don’t forget the debt

Staying on the theme of risks in plain sight, geopolitics was also in the news as tensions increased across the Middle East, forcing energy prices higher and dampening sentiment in many risk assets. The combined effect of improving economic activity, higher commodity prices, and possible delays to monetary policy loosening pushed bond yields higher.

Other risks that didn’t attract headlines last week but remain in plain sight are continued stresses in Chinese property and developed-market commercial real estate, as well as ever-increasing global indebtedness. After rising US$15 trillion in the final quarter of 2023, the Institutional Institute of Finance recently revealed global debt hit a record high of US$313 trillion at the end of 2023 and has risen US$100 trillion over the last 10 years.⁴

Charts of the week

Figure 1: Bloomberg Commodity Index

Source: Bloomberg, as of April 5, 2024. For illustrative purposes only.

Figure 2: JP Morgan Global Manufacturing PMI

Source: JP Morgan, S&P, as of April 5, 2024. For illustrative purposes only.

 

References

1.Charles Schwab International, ‘Top Global Risks of 2022’, December 19, 2021
2.Fortune, ‘Nearly half of investors expect a ‘no landing scenario’, March 25, 2024
3.Note: A PMI reading above 50 indicates output is expanding overall; below 50 means it is contracting.
4.Reuters, ‘Global debt hits record high’, February 21, 2024

 

Past performance is not a reliable indicator of current or future results.

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of 08 April 2024 and may change without notice. All data figures are from Bloomberg as of 08 April 2024, unless otherwise stated.

-----------------------------------

Important Information 

Muzinich & Co.”, “Muzinich” and/or the “Firm” referenced herein is defined as Muzinich & Co. Inc. and its affiliates. This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability, heightened pricing volatility and reduced market liquidity. Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only. Any forward-looking information or statements expressed in the above may prove to be incorrect. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Muzinich gives no undertaking that it shall update any of the information, data and opinions contained in the above. United States: This material is for Institutional Investor use only – not for retail distribution. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC. Issued in the European Union by Muzinich & Co. (Ireland) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland, Company Registration No. 307511. Registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom.