Dear all,

Greetings, everyone! With March upon us, let's dive into our latest market insights. In February, global equities extended their upward momentum, with major indices including the S&P 500 (+5.2%), Germany's DAX (+4.6%), France's CAC 40 (+3.5%), India's Sensex (+1.0%), and Japan's Nikkei 225 (+7.9%) all hitting record highs. Meanwhile, bond yields and the US Dollar Index experienced short-term volatility and rebounded as market consensus on rate cuts solidified. Commodities delivered mixed performance, with crude oil edging up slightly (+3.2%), while soft commodities such as cocoa surged (+36%), yet corn and soybeans continued on a downward trajectory.

Our March house view focuses on three aspects:

  1. Liquidity: Are scaled-back rate cut expectations cause for concern?
  2. Fundamentals: Are there any lingering worries about a global recession? How is the manufacturing recovery shaping up?
  3. Market Sentiment: Is the market overheating for the short term? Is a bubble forming?

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1. Liquidity check: Should diminished rate cut prospects become a source of worry?

Our Take: As long as there’s no rate hike, valuations should remain intact

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Various Fed signals in February, including Fed officials shifting focus to service inflation and stressing the need to see inflation ease beyond goods and the January CPI print showing higher-than-expected service inflation, have swiftly converged the market’s rate cut expectations from six cuts to just three cuts for the year.

Throughout the process, we have maintained that these adjustments should be considered a positive development, in that it helped forge a consensus and bring market expectations closer to the Fed’s stance. And looking back, the stock market remained largely unfazed by shifting rate cut expectations, continuing its upward trajectory and reaching new highs.

It's important to note that Fed discussions have focused on rate cuts, on the possibility, timing, etc. Our take is that as long as the Fed does not revisit the topic of rate hikes, from a liquidity point of view, impact on stock market valuation would remain minimal. This is because it is interest rate increases that trigger valuation adjustments. As long as we’re in a rate cut cycle, whether rate cuts will happen later than sooner or remain unchanged should not affect valuations too much.

Then what do valuations reflect? Fundamentals, which are faring pretty well! We delve into that below.

2. Fundamentals: Are there lingering recession worries? How is the manufacturing recovery shaping up?

Our Take: Recession probability greatly reduced, manufacturing to see uneven recovery but won’t hinder bullish trend

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