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Market Comment - October

As if the rise in interest rates and much uncertainty about the future of the global economy were not enough, the world was hit by another global shock, as Hamas terrorists attacked Israel, leading to a massive escalation of a conflict that has been going on forever. However, financial markets did no care much after all. During the cold war 80’s, there was a joke among traders: A newscaster reports, ‘The Russians launched ICBMs at America this morning, causing the stock market to plunge, but it rebounded sharply in the afternoon on a rumor that the Fed might cut the discount rate.’ While this may be a bad joke, it is very much fitting present times. Investors have been conditioned to ignore geopolitical risk. Interest rates remain the key driver for investment decisions. As the US 10-Year Yield hit 5%, Fed Chair Jerome Powell communicated, that the Central Bank may have done enough, sparking a huge risk-on rally in financial markets. Obviously, Mr. Powell has once again no clue were inflation is heading, but he needs to protect the Shadow Banking System. The regional banking crisis, that took place in March 2023, happened 4 months after the first big sell-off in treasury bonds. The month of October has inflicted even more losses to bond holders. Mr. Powell fears the fragility of the financial system much more than inflation. Unfortunately, he can’t have the cake and eat it too. November has shown how problematic the financing of the US debt will become in the coming years. Absent of a recession, the market is not willing to absorb the supply of US government debt, especially on the long end of the yield curve. Long duration, despite the big rise in yields, remains hard to sell. A recession would be a welcome remedy to change this, but it will increase credit risk on lower quality, which would lead to other problems in credit markets. The financial world remains a fragile place. While overshadowed by an increasing amount of risks, there is blindfolded confidence, that the market will enjoy a year end rally, as it mostly does during the months of November and December. Crude Oil continued to fall sharply during the first week of November, ignoring geopolitical risks as well. Having sold down the Strategic Petroleum Reserve and having adopted a policy that discourages drilling for oil, the U.S. has left itself quite vulnerable to higher oil prices. Globally, storage is at a multi- year low. Maybe Crude Oil is anticipating a weak economy, but the supply side does not look strong. We are heading for a great buying opportunity for sure. Looking at the long term trends for European- and US equity markets, there are clear signs, that we are leaving the bull market that has started in 2009. While the situation maybe less clear for the US stock market, Europe should be heading for a bad surprise, especially France. The US election year seasonality is showing a very difficult investment environment during the first two quarters and the chaotic situation on Capitol Hill is breathtaking.

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