Weekly Commentary

January 19, 2024

Earnings season is underway, with the big banks, as usual, leading the way. As Charles Dickens might describe the situation, it was the best of times and the worst of times.? Most major banks reported in-line or slightly better than expected (JPM continues to outperform on an earnings basis), but most regional banks, which have begun to report this week, have seen profits sour. Obviously, the regionals and super-regionals have been more affected by last-year's crisis, but they also are more exposed to certain sectors of the economy that have seen a slowdown (construction, commercial real estate, autos, etc) and are not as tied to trading and/or wealth management as the big banks are.?

For its part, CPI in the US came in a little higher than expected (in other developed countries such as the UK as well) in December.? The number, however, did not scare the markets into thinking the Fed will postpone its March rate cut—yet.? In fact, stocks mostly shrugged off the result, and have traded sideways for the week. We think the markets are building an expectation that will be hard for the Fed to fulfill, especially given the state of the economy (relatively strong, and with a solid retail sales number in December).? It also does appear that major indexes are facing technical resistance and have not been able to achieve higher highs for the year.? Given this, we are looking to implement options strategies to protect against a rate-cut disappointment in March, especially with volatility (the VIX is currently under 15) relatively low, meaning that buying protection is not very expensive, at least by historical norms.? ??

We have also taken a look at the commodities markets as of late, especially the crude oil market.? With American-led airstrikes in Yemen, a growing conflict between Pakistan and Iran, and the Gaza-Israeli war with no end in sight, the oil market has not budged.? In fact, oil is down roughly 10% in the 100+ days since the Gaza conflict began.? This is an anomaly from previous Middle Eastern conflicts (there are currently three).? Many have suggested that this is because the US only imports around 15% of its energy needs from the region, down from two-thirds before the US shale boom.? But if these conflicts linger and the economy remains resilient, could this mean that WTI is cheap?? Time will only tell.

Finally, the Iowa caucus have a clear win to the Trump candidacy, with the ex-president capturing more than 50% of the (low turnout) votes.? It is increasingly likely that a rematch between Trump and Biden this year is going to happen, much to the chagrin of many disillusioned voters.? And current head-to-head polls give Trump a slight advantage, especially given Biden's high disapproval ratings and multiple geopolitical crises and a border debacle to handle.? The race has just begun, but look for markets to pay attention to the campaign, probably by the summer.? ? ?

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