Creand Wealth Management points to a hypothetical rise in inflation as the main risk for markets in the second half of the year

The bank also points to protracted conflicts in Ukraine and the Middle East and electoral processes, especially in France, as other decisive factors. The market is complacently looking towards a Goldilocks scenario, where growth is neither high enough to generate inflationary pressures, nor too weak to trigger a recession.

Yields on government bonds in the major economies are trading in a relatively narrow range, so the bank would take advantage of rebounds in yields to increase duration. In equities, it sees better opportunities in Europe, in a scenario of macro convergence with the US, and with earnings estimates starting to grow.

Creand Wealth Management, private banking specialist, sees a hypothetical pick-up in inflation as the main risk to markets in the coming months, which would force central banks to keep rates higher for longer and directly affect global economic growth.

Another element having a major effect on the markets is the political situation in France. The second round of the legislative elections will be held this Sunday, with the possibility of Marine Le Pen’s National Rally (RN) winning a victory that would lead to a system of “cohabitation” with the current president, Emmanuel Macron. Para Luis Buceta, Investment Director at Creand Wealth Management, says “although France is considered part of Europe’s economic core, it now shows debt and deficit dynamics that are worse in many respects than peripheral countries”. Creand WM explains that French banks are the fourth largest international lender after Japan, the US and the UK, with USD 2.4 trillion in foreign loans on their balance sheets.

In addition to France, Creand WM also underscores the importance of other electoral processes taking place over the coming months, such as the elections in the UK this week and the US presidential election in November, as well as a new electoral contest in 2025 in Germany, with the possibility of the rise of the far-right AfD party, which is proposing a referendum on Germany’s exit from the European Union (Dexit). Added to all this are the geopolitical conflicts that remain entrenched in Ukraine and the Middle East.

On the macroeconomic front, the bank highlights the convergence at the macro level between the US and Europe, due to the deterioration of the former and the improvement of the latter, also supported by a certain recovery in China and the end to the energy crisis. For Creand WM, the baseline scenario remains that of a macro slowdown, although the market is pricing in a Goldilocks scenario, an economic situation of growth that is neither so high as to generate inflationary pressures, nor too weak to trigger a recession. On top of this, there is the European Commission’s proposal to subject five EMU countries, not including Spain, to excessive deficit procedures, among them France and Italy. This measure would require them to improve their primary structural deficits by 0.5% per year.

In the case of the US, the latest data also shows a deterioration of its economy, due to a weakening of consumption (an increase in NPLs and credit card usage) and also a worsening of the latest labour market data. We are also seeing the improvement in China’s data, which affects Europe more positively.

Rate cuts pending data

As for central banks, the decoupling with the ECB lowering its benchmark rates and the Fed waiting to decide its pivot moment, with stickier inflation and labour market data still solid, we see a scenario of a reduction in the forecast number of rate cuts—between one and two until the end of the year. In the case of the ECB, which set out on the path of rate cuts in June, the next decisions will remain data-dependent, in particular regarding the confirmation of disinflation and wage developments. In any case, Creand WM explains that the ECB has not committed to a concrete rate path, reiterating its reliance on macro data developments, basically ruling out a cut by July.

With regard to the Federal Reserve, the bank explains that it is expected to continue with the consideration of higher rates for longer, with the market discounting a cut before the end of the year, influenced by consumer behaviour and by the stability of the labour market. However, relatively benign CPI data in the US supports the possibility that a further downward trend in inflation may help open the door to further rate cuts.

Miguel Ángel Rico, Investment Director at Creand Asset Management, explains that “despite weaker inflation data, Chairman Powell adopted a less dovish tone. Although the Fed’s dot plot downgraded hopes for monetary easing in 2024 from a central projection of three cuts this year to just one cut, there is a sense in the market that a first move in September remains possible, if summer data continues to moderate”.

Equities, Europe’s outlook better than that of the US

In June, as a result of the uncertainty of the political situation in France, the relative Eurostoxx/S&P500 ratio has plummeted, there are more attractive valuations and a possible convergence of growth in both regions, with an acceleration of the Eurozone, while the US economy is showing signs of slowing down that could support the European stock market.

In this scenario, Creand WM is seeing a rotation towards more defensive sectors in the second quarter of the year compared to the first. Although the bank explains that “valuations appear demanding as a result of complacency in the market and investors have gone into ‘buy-the-dip’ mode, which has kept prices steady”. The bank also notes that “earnings estimates in Europe are starting to rise and this is having a positive impact on share prices”.

By geographies, Creand WM sees an improvement in Europe versus the US, although it points out the need to consider some risks, such as a macro slowdown in the US that would also affect Europe, and the high weight of very few companies, such as Nvidia, in the US indices. Nvidia recently became the largest company in the world by market capitalisation, surpassing the value of all listed stocks in Germany, France and the UK.

Fixed income, a commitment to longer duration

Creand Wealth Management notes that yields on government bonds in the major economies are trading in a relatively narrow range, so in this scenario, the bank would take advantage of rebounds in yields to increase duration. Although the curve continues to invert, Creand WM believes that “it should turn positive in the medium term”. Moreover, it has occurred against a backdrop of large volumes of new issues, highlighting the strong appetite for this asset class in an environment where attractive yields can also be achieved.

Creand WM explains that bonds rallied amid weaker US inflation data and flows into quality following French President Macron’s snap decision to call parliamentary elections. On the corporate bond side, Creand WM notes that European spreads have substantially underperformed in recent weeks, with French assets underperforming and the financial sector also unwinding earlier gains. On the other side of the Atlantic, the US spreads have been more stable.

With regard to currencies, the bank indicates that the euro has proven to be relatively resistant, despite the turbulence in France. This can partly be explained by signs of US growth cooling off. However, Creand WM also explains that it could also be a sign that the dollar is overvalued, and that it will not return to parity against the euro, despite the pick-up in euro area tensions. As for the yen, the Japanese currency is trading around 159.8 against the dollar, its weakest level in two months and near new lows, raising expectations that the authorities will intervene again in the foreign exchange market