Markets Remain Rangebound As Noise Drowns Out Signal

Even more than normal, the ‘noise to signal’ ratio has been off the charts in recent weeks, with markets full of competing narratives and driving forces, plus a rather unhealthy dose of hyperbole in the mix as well, even while most major assets remain within very tight, and very familiar ranges.

Equities, for instance, have seen a notable sector rotation under the surface in recent weeks, with participants ramping up exposure to cyclical names exposed to the ‘real’ economy, not only as incoming US data increasingly surprises to the upside, but also as participants take something of a more sceptical view of AI-related developments, in terms of both seemingly endless increases in capex from hyperscalers, but also the potential for new technologies to upend traditional business models. Clearly, both of those can’t be true, and the truth probably lies somewhere in the middle, where some of the debt-financed hyperscalers are likely taking things to excess, and some business models will have to change, though neither will lead to ‘Armageddon’.

Zooming out, the bull case is still a robust one, with earnings and the economy at large still both growing at a solid pace, monetary tailwinds set to mount as the year progresses, and the fiscal impulse becoming increasingly positive too. Though index-level gains may, to an extent, be capped by the huge weightings possessed by megacap tech names, the ‘path of least resistance’ overall continues to lead to the upside, and I continue to view dips as buying opportunities.

Meanwhile, the FX market has also become rather dull of late, with the dollar having traded in a super-tight range, between 96 and 100 in the DXY, since last summer. While there’s been plenty of talk about the ‘sell/hedge America’ trade, amid increasingly volatile policymaking in the Oval Office, this has coincided with the US economy continuing to notably outperform peers, with the Q4 GDP data due later this week likely to provide further evidence of this outperformance, even if there will be a downside skew stemming from last year’s government shutdown.

My bias remains that, eventually, the still-solid pace of economic expansion will give dollar bulls the upper hand once more, though we don’t seem to be at that stage just yet, and getting to that point will require a significant dialling down in terms of noise on the political front, which also seems a bit of a long-shot for the time being.

Lastly, it’s the same story in the FI space, where USTs have been rangebound for most of the last six months or so, with the benchmark 10-year yield stuck in about a 30bp range. Again, there’s competing narratives here, with the ‘run it hot’ narrative contrasting rather sharply  with a continued gradual cooling in incoming inflation data, and with the ramping up in Treasury supply (& corporate issuance) having all been absorbed relatively well thus far, amid still-healthy demand both domestically, and internationally.

Stepping back, I think the overall message here is that it’s probably easier than ever these days to get swept up in the latest trend, to get over-excited about the latest bout of sector rotation, and to get swept up in the hysteria over whatever the current zeitgeist is. Allowing oneself to fall into that trap runs the risk of missing the bigger picture – namely, that despite all the noise, markets right now, be it stocks, the dollar, or Govvies, aren’t in that much of a different place to where they were three, or even six months ago. From a broader perspective, the most appropriate mindset right now is probably a ‘wait and see’ approach.