Navigating the Winds of Change: Debt Ceilings, Market Fluctuations and the Resurgence of Tech [ENG]

The conclusion of the Debt Ceiling deal has arrived as the market has been anticipating. A sense of relief has driven the recent rally across Equities and Credit markets.

At current levels, from a tactical standpoint, there seems to remain little risk premium to be reaped from Credit markets. The projected issuance of approximately $1.2 trillion in bills this year, with a significant $600-$700 billion slated for June alone, hints at a potential liquidity crunch which could lead to high volatility across risky assets.

Within Equities, the boom in Technology and AI-driven sectors explains all the market’s upside. Standouts like chipmaker Nvidia are however not representative of the general state of affairs. Most US companies are actually struggling this year, with the S&P 500 Equally-Weighted Index remaining more or less flat, trailing the float-weighted S&P 500 Index by approximately 10 percentage points. 

Digging deeper, it is noteworthy that corporate returns on invested capital within the US have seen a gradual decline, whilst the cost of capital has significantly risen in recent months. Also looking beyond American borders, the combination of a decreasing Chinese PMI, a faltering Eurozone confidence index, and an unpredictable geopolitical climate urge us towards a cautious stance. 

Given these dynamics and the ongoing tightening by central banks, investors would do well to tread with prudence.

Clément Perrette
Senior Fixed Income Fund Manager
 

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