The Cambridge Weekly – 30th October 2023

The Cambridge Weekly – 30th October 2023

The resilience narrative comes under pressure

A potentially meaningful change in correlations happened last week. In recent times, a fall in yields (and therefore a rise in bond prices) would go alongside rises in equity prices, particularly the mega-cap growth consumer-related techs like Amazon, Alphabet (Google), Microsoft and Apple. Last Thursday, US Treasury long maturity yields started to retreat from highs but, this time, US stocks carried on lower. It was not just equities which weakened. In the credit markets, despite higher government bond prices, corporate bonds were flat to weaker, especially among the more indebted companies. If this new dynamic continues, it may signal a change in investor expectations regarding the resilience of US sales and earnings growth.

Oil majors double down

Big oil companies have felt the urge to get bigger recently. In October alone we have seen two of the biggest acquisitions in the history of the oil and gas industry. Last Monday, Chevron announced it will purchase fossil fuel producer Hess for $53 billion, less than two weeks after rival ExxonMobil agreed a whopping $59.5 billion deal for Pioneer Natural Resources. The deals have remarkably similar profiles: two American supermajors each buying a US-based company in the production and exploration space for near-identical sums, paid for in both instances entirely in shares of the acquiring company, rather than cash.

Is the ECB turning dovish?

As widely expected, the European Central Bank (ECB) kept interest rates steady last week. Meeting in Athens last Thursday, policymakers maintained its deposit base rate at 4.0%, and its refinancing operations rate at 4.5%, after hiking for 10 consecutive meetings. The last year-and-a-half has delivered the sharpest rate-rise cycle in the history of the Eurozone, also prompted by the continent’s worst energy supply crisis since the Second World War. The ECB has tightened aggressively despite non-existent economic growth during that time, but inflation has remained uncomfortably high.