MARKET THOUGHTS INTO Q1
We are getting a glimpse of the likely Q1 evolution here today in Europe. The confusion is that with a meaningful pullback in bond yields over the last month, the reflation trade has barely lost steam, and with better inflation/PMI prints over the last 2 days, it has restarted aggressively. The point is that there is a re-evaluation of value as a whole, so banks/autos/miners are now the same trade.
We would be long autos. The currency move is helpful, and until the tightening monetary conditions in the US hurt US growth, this is likely to continue to be the case. Valuations are still very low, and the difference between 4x PE and 6x PE is material for price without making stocks look expensive. This rationalisation is already playing out, and we would be quick to book profits should the mood change.
Against that we would be short airlines. They largely source in dollars and earn in EUR/GBP, so the currency moves are a headwind. On top of that the yield environment is not improving, and oil price tailwinds are abating.
Long banks. Valuations are not stretched and Draghi, along with all CBs now, is working to steepen the yield curve – he normally gets what he wants. Litigation slowly being resolved more favourably and Basel committee meeting delay helpful at the margin.
Short food and bev. Very good bounce given minimal move in yields and still poor earnings momentum. Yields should continue higher in the near term given the data, eventually that will weigh.
Long oils. With OPEC/non OPEC cuts coming at a time when most majors have cut costs to achieve oil breakeven at or below current levels. Part of those cost cuts has been rationalisation of exploration such that in the medium term supply will be tighter than it should be. Will be wary of the US as the marginal producer, but for now the trade has momentum.