Tolomeo Capital

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The next ECB interest rate cut and S&P earnings - ECB reacts to very weak economy. - US consumption should remain robust. - S&P earnings should support sentiment. From a European perspective, the next ECB meeting on Thursday is particularly important. The markets are eagerly awaiting another rate cut. It will also send signals about the next steps. But even if the ECB disappoints, we do not expect sentiment on the European equity markets to deteriorate. Most international investors are buying European equities because of their close correlation with the US. From the perspective of international investors, the US retail sales on Thursday are the most important event this week. As the US labour market data has confirmed strong job growth and steady wage growth, retail sales should also show stable growth. The third important event this week is the S&P Q3 reporting season. At the beginning of this week, the major US banks will give an indication of the direction in which profits should develop. Market expectations are high, but not too high. Given the positive US economic data of recent weeks, we believe that a positive corporate earnings surprise in Q3 is quite possible.

US soft landing, Fed and ECB interest rate cuts and China's support measures should offset global risks. - US soft landing intact. - Markets can cope with rising interest rates. - China euphoria continues. - Geopolitical tensions require hedges. Welcome to October! The month that always brings surprises! At first, the euphoria over China's new support measures dominated. Then the situation in the Middle East came to a head and sentiment cooled considerably over the course of the week. This was followed on Friday by a very strong US labour market report, which confirmed the very soft landing of the US economy. What does this mean for portfolio allocation? The US exposure remains the central component of the portfolio, and a diversified cyclical orientation remains appropriate, as the “soft landing” of the US economy is intact. European exposure should play a greater role in the portfolio to react to the positive interest rate signals from the ECB and to take advantage of the positive correlation with China. Dax exposure is particularly suitable for this. Whether to invest directly in China should depend on individual risk appetite and investment horizon. In our view, only investors with a high-risk appetite and a short-term investment approach should build up direct China exposure, as profits should be realized quickly. Longer-term investors should include China in their portfolio via a broad emerging market exposure or via Europe. Risks in the Middle East require oil and US dollar exposure as hedges.

- Priority: stabilization of the labor market. - Domestic demand benefits. - Market sentiment and risk appetite should rise. The Fed's rate cut of 50 basis points shows that it expects inflation to fall further. The Fed is therefore focusing on stabilizing the labor market. The Fed's projections show that interest rates are to be cut by a total of around 200 basis points by the end of 2025. The expected low point of the rate cut cycle will then be reached in 2026 at 2.90%. This outlook should strengthen market sentiment and risk appetite. Stable growth in the US economy of around 2% continues to offer an attractive environment for investors. What does this mean for portfolio allocation? We expect investors to use periods of weakness in the US equity markets as an opportunity to build up new US exposure. The outlook for interest rates and growth seems too positive for investors to ignore this signal or even position themselves against it. Cyclical sectors should be given greater weight again. These include Discretionary, Technology, Health care, Financials and Real Estate. We also expect industrials to be in greater demand again. The dividend theme remains important as a supplement and for risk management. The fact that technology companies have also recognized the importance of dividends is illustrated by Microsoft's announcement to increase its dividend. Bonds remain another important element of portfolio stabilization.

Could France become the next big risk in Europe? Following the recent parliamentary elections, France is facing a political deadlock until 2027. President Macron and the left-wing coalition are at odds, making it difficult to tackle the growing budget deficit and rising debt. France's deficit stands at 5.5%, with debt reaching 110% of GDP. These figures are causing alarm bells to ring on the markets, especially as fiscal policy is being scrutinized more closely. The EU Commission may recommend measures to control debt. However, given the current political stalemate, it is unclear whether these will be implemented. Any attempt to increase spending could trigger sharp market reactions. We have seen what can happen. During the 2010 debt crisis, the spread between French and German bonds jumped, highlighting the potential for renewed tensions in the eurozone. The markets are watching this closely. They are hoping that the rising spreads will prompt France to exercise fiscal caution, but they are also looking to the ECB. However, ECB intervention is only likely in extreme cases, which increases uncertainty. At Tolomeo Capital, we monitor the development of interest rates and country spreads as important risk indicators. We also assess the potential impact on the euro and French equities. Although we primarily trade equities, incorporating interest rate and currency fluctuations into our risk management is crucial. We systematically monitor these signals to stay one step ahead of potential risks. How do you think these risks will affect your investments? Let's explore the options together.

The Fed has it in its hands - A signal for steady interest rate cuts can stabilize the markets and put them in a positive mood. - Risk: weakening US consumption. - The Bank of England can send a positive signal in Europe. The markets continue to speculate about the strength and robustness of the US economy, while inflation is slowly declining. The Fed therefore not only has the leeway to cut interest rates on Wednesday, but also to hold out the prospect of further rate cuts in the coming months if the decline in inflation continues. This signal is crucial to underpin the rate cuts of more than 260 basis points by the end of 2025 that the markets have priced in. Anything less is likely to lead to significant volatility on the equity markets. In Europe, the contrast between the UK and the eurozone is widening. In the eurozone, VW's restructuring plans and BMW's profit warning in particular have exacerbated the weak economic environment. German economic data also emphasizes that the economic situation could deteriorate further. The signals from the automotive industry in particular continue to give cause for concern. It remains questionable whether the ECB's interest rate cuts will lead to an improvement. In contrast, the British economic data points to a steady improvement in sentiment. This applies both to the particularly important service sector and to industry. Consumer spending is likely to benefit from the ongoing recovery in the property sector. In this environment, the Bank of England could give the economy a further boost by hinting at further interest rate cuts in the coming months on Thursday.

Is rising government debt the next big risk? The IMF and BIS have recently warned of rising government debt, particularly in the US. With spending likely to push debt to well over 100% of GDP by the end of the decade, the risks are growing. If nothing changes, investors could lose confidence in US government bonds, leading to a rise in long-term interest rates and a weakening of the US dollar. However, markets often focus on short-term factors such as inflation and growth. US government bonds still serve as a safe haven in uncertain times. The real question is: when does debt become the dominant concern? At Tolomeo Capital, we don't try to accurately predict that point in time. Instead, we continuously monitor debt risk using indicators such as the correlation between interest rates, inflation and growth expectations. We also monitor bond spreads for signs of changing investor sentiment. Our system tracks these risks using volatility indices and interest rate movements in the US and Europe. We pay close attention to changes in market expectations along the yield curve. If new risks emerge, they should show up here. We also monitor the correlation between equities and bonds. A simultaneous decline in both, especially if it occurs suddenly, is often a bad sign for market sentiment. By focusing on significant changes, we try to identify early warning signals. Our approach is flexible and adapts to market conditions and liquidity. At Tolomeo, we process these signals systematically in order to manage risk effectively. How do you think rising debt will affect your strategy? Let's talk about it.

No end yet to the increased market volatility - Stock markets remain concerned about the growth outlook. - A further data-dependent ECB may increase volatility. - EUR and US economic data should stabilize sentiment. We think that only the Fed can stabilize the markets. This can therefore only happen after the meeting on 18 September, when Fed Chair Powell not only announces a rate cut but also explains the strategy going forward. Should US data surprise to the downside by then, a 50-basis point rate cut is likely. So far, the Fed's labor market and inflation data have left room for maneuver. It is important that Fed Chair Powell and the new macro projections largely support the interest rate cuts of more than 200 basis points priced in by the markets by the end of next year. Otherwise, the markets will be disappointed and probably react strongly negatively. What does this mean for portfolio allocation? A defensive positioning is appropriate at least until the latest Fed decisions are announced on 18 September. This includes exposure to Staples, Utilities, Health Care and Real Estate. The latter two sectors will benefit in particular from a stronger decline in long-term interest rates. On the cyclical side, we are holding on to financials exposure in particular, as we continue to expect a soft landing of the US economy. In addition, a higher bond exposure should complement the dividend theme on the equity side.

Focus on the US labor market - Time for the important US data. - A weaker labor market could lead to larger Fed rate cuts. - EUR economic outlook remains weak. In their recent speeches, Fed members have repeatedly emphasized the labor market when discussing the interest rate outlook. The message is that the Fed stands ready to cut rates more if the labor market deteriorates. On the one hand, this puts the latest US labor market report on Friday even more in the focus of the markets. On the other hand, the ISM business climate reports on Tuesday and Thursday are important for the outlook for the US economy. The outlook for the eurozone remains gloomy. We are concerned about the latest German ifo business climate report. So far, there is no end in sight to the economic stagnation. European equity markets therefore continue to depend on expectations of interest rate cuts and the correlation with US indices. What does this mean for portfolio allocation? The focus on US labor market data entails the risk that the markets will react even more strongly than usual to small deviations. At company level, the market reaction following the Nvidia results leads to the same conclusion. We therefore believe a more defensive allocation is appropriate. This includes exposure to Staples, Health Care, Utilities and Real Estate in order to benefit from a stronger decline in long-term interest rates. On the cyclical side, we continue to prefer Industrials, Materials and Financials. Consumer-dependent sectors are likely to slowly face more headwinds as the labor market outlook deteriorates, wage growth slows and pandemic savings are depleted.

US growth remains in focus - Powell confirms that interest rates will fall. The pace remains flexible. - High market expectations require confirmation of robust growth. - US data at the beginning of September decisive. In his speech at the Kansas City Fed symposium in Jackson Hole, Fed Chair Powell supported market expectations that the Fed will start cutting interest rates in September. However, the pace remains open. Against this backdrop, what can keep market sentiment high? In our view, the growth outlook for the US economy is the key factor. If the US economy remains robust, as Fed Chair Powell has once again emphasized, the markets should be able to cope with slower interest rate cuts and remain optimistic about the stock market. The markets are therefore focusing on the important US data, which is due at the beginning of September in particular. These include the ISM business climate reports and the latest from the US labor market. What does this mean for portfolio allocation? A positive trend in the US equity indices remains the key prerequisite for positive momentum in the European large-cap equity indices. In the USA, UK, Switzerland and Japan, domestic economic developments also offer opportunities for investors. Global export demand is weakening as China and the eurozone are expanding at a much slower pace and the US economy is cooling. The correlation of an equity index with the last important growth driver of the global economy, i.e. the USA, therefore, remains an important allocation parameter. Domestic exposure to the eurozone is hardly attractive, as both private consumption and investment are weak. It remains to be seen whether ECB interest rate cuts will stimulate domestic demand. So far, this is not the case.