Market Commentary October

Although inflation in the United States is falling steadily and, at 3.7% in August, came within sight of the inflation target of 2%, the Federal Reserve announced a possible further interest rate hike at the end of the year. This announcement by the Fed was poorly received by the financial markets. In the USA as well as in Europa, the financial markets would then probably have to come to terms with higher interest rates for longer than expected.

The US bond market reacted accordingly, sending bonds into a dive. Yields on 10-year government bonds rose by almost 17% to 4.8% in the past 30 days.

The futures market, on the other hand, does not expect another rate hike. The head of the European Central Bank, Christine Lagarde, also announced that the September rate hike would be the last. However, with inflation close to 5% (see chart below) and core inflation at 4.4%, this is difficult to comprehend.

Central banks can hardly influence food prices and the inflation of energy commodities, where (geo)politics and climate have more direct leverage. The control of core inflation, on the other hand, is easier to influence, namely via the pace of economic velocity, i.e. private consumption. In the Western industrial world, this accounts for about 2/3 of the Gross Domestic Product.

In order to get a grip on price increases, the European Central Bank will sooner or later have to slow down this demand and economic growth. This will require further interest rate hikes.

The market is hoping for a soft landing. However, as such a soft landing has rarely been achieved in the past, we expect the economy to cool down more sharply, i.e. the probability of a recession has increased.

Holdings

Tops
Thanks to strong results in the first half of 2023, the management of Danish shipping company D/S Norden A/S was able to slightly raise its net profit forecast. The shares acknowledged this with a monthly performance of plus 19%.

As in the previous month, the shares of internet company United Internet AG were among the top performers in September with a gain of 14%. The positively reported result at the beginning of August helped to boost analyst ratings, which was reflected in rising share prices.

Proximus NV will be the only telecommunications company in Belgium to broadcast all UEFA Champions League matches. This is probably responsible for the share price strength of +10% over the last month.

Flops
Due to a metal theft, the management of the German copper and precious metal producer Aurubis AG had to revise its business forecasts for the current year. The damage is expected to burden the balance sheet with EUR 185 million, the share lost 8% over the month.

The prospect that the increase in reimbursements for dialysis treatments will not be sufficient to offset inflation-related costs put the shares of the German dialysis specialist Fresenius Medical Care AG & Co. KGaA under pressure (8%).

A Dutch court accused Aegon NV (recently acquired by ASR Nederland NV) of not providing sufficient cost transparency. As a result, the shares of ASR Nederland NV dropped by 12% over a period of one month.

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Sincerely

Your CIIM Team