ALTERNATIVE MARKETS UPDATE – MID NOVEMBER 2023 & Macro and political outlook november 2023 by marco eagle

​The conflict between Israel and the Hamas is in full force and it seems unlikely that the situation will be resolved soon. While the conflict started with an attack from Hamas on civilians in Israel, the focus has fully shifted towards Gaza with group, air, and sea retaliation by the Israel military. Israel is strongly focusing on Gaza, as it is seen as the center of the Hamas. The conflict in Gaza is widely seen as a precarious situation, as Israel is completely blocking entry or exit even for vital goods, such as food, water, and medical supplies. While Israel was supported initially by most Western countries (especially due to the many hostages taken), support is continuing to fade, due to the humanitarian crisis it caused in Gaza. Despite the decreasing support, Israel seems determined to not only free all hostages, but also disabling the military and governmental capabilities of the Hamas. Unsurprisingly, the conflict also affected financial markets significantly. While initial price shocks mostly normalized since early October 2023, oil markets could experience further volatility. Additionally, given the already pressured economies, investors move more capital into safe-haven assets, in particular US-Dollar and gold.

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RESEARCH PERSPECTIVE VOL. 215 November 2023 Alternative Markets November 2023 The conflict between Israel and the Hamas is in full force and it seems unlikely that the situation will be resolved soon. While the conflict started with an attack from Hamas on civilians in Israel, the focus has fully shifted towards Gaza with group, air, and sea retaliation by the Israel military. Israel is strongly focusing on Gaza, as it is seen as the center of the Hamas. The conflict in Gaza is widely seen as a precarious situation, as Israel is completely blocking entry or exit even for vital goods, such as food, water, and medical supplies. While Israel was supported initially by most Western countries (especially due to the many hostages taken), support is continuing to fade, due to the humanitarian crisis it caused in Gaza. Despite the decreasing support, Israel seems determined to not only free all hostages, but also disabling the military and governmental capabilities of the Hamas. Unsurprisingly, the conflict also affected financial markets significantly. While initial price shocks mostly normalized since early October 2023, oil markets could experience further volatility. Additionally, given the already pressured economies, investors move more capital into safe-haven assets, in particular US-Dollar and gold. Cryptocurrency markets showed a strong upward trend since mid October 2023. The rally started with a more promising outlook on the SEC’s decision on spot Bitcoin ETFs. Over the past few days, BlackRock’s iShares launched a new corporate entity focusing on an Ethereum Trust, which further increased the anticipation of the development in crypto markets. Bitcoin (BTC) started at $16k in 2023 and doubled by the end of October 2023 following the spot Bitcoin ETF discussion. The latest development in Ethereum’s (ETH) ecosystem caused a further rise almost $38k. Ethereum started in 2023 at a level of $1,260 and surpassed the $2k mark for the first time in 2023 following this development. It peaked at above $2,100 and remains close to that level. Figure 1 shows the price development of BTC and ETH over 2023, in which BTC outperforms ETH by a substantial margin. This is not surprising as BTC tends to the best when the crypto market is in a difficult situation, especially after the sharp drawdown of 2022. There were also substantial news on FTX, one of the largest cryptocurrency exchanges, that went bankrupt in November 2022. On the one hand, the trial against its former CEO, Sam Bankman-Fried, attracted most of the spotlight with the numerous criminal charges. A jury found him guilty on the first portion of charges, which could result in a prison sentence of up to 115 years. On the other hand, for the exchange, promising news emerged from Gary Gensler, the chairmen of the SEC. He made comments about a potential revival of FTX provided that the exchange would follow the law. As a consequence, FTT (FTX Token) soared 84% shortly after. Figure 1: Growth of Bitcoin (BTC) and Ethereum (ETH) from January 2023 to November 2023, Source: CoinMarketCap, November 2023 Macro and Political Outlook November 2023 By Macro Eagle I – October RECAP: October was a wild mix of US yields moving higher, mixed Q3 corporate earnings and a dramatic escalation in geopolitical risk – with clear dominance of US yields, as evidenced by the paradoxical fact that after the 10/7 Hamas attack on Israel, equities first went higher (as bond yields fell). The middle of the month saw max pessimism (“high for longer yields” and War escalation worries) finally sending equities lower. But just when the S&P500 reached “correction territory” (-10% from previous peak) on Friday 27th, the market roared back on the back of (1) lower bond issuance guidance by the Treasury; (2) Fed Chair Powell’s dovish FOMC comments and (3) weak job numbers implying a slowing economy (and therefore lower yields).  Bottom line: we are all bond traders now. Figure 2: Overview of the S&P 500 Return and Macro News in October 2023, Source: Macro Eagle, November 2023 II – October TOP 10: (1) On 7/10, Hamas inflicted the deadliest attack on Israel in the country’s history. (2) Kevin McCarthy became the first US House Speaker to be ousted. (3) The US Deficit reached 7.5% of GDP, the third largest on record. (4) President Xi paid his first ever official visit to the PBOC. (5) 10y US Treasury yields crossed 5% for the first time since 2007. (6) US equities reached a 20-year low in terms of relative attractiveness as the ERP turned negative. (7) Country Garden, China’s biggest developer, defaulted on a dollar bond for the first time. (8) In Poland, the EU-friendly opposition won the general election. (8) The right-wing Swiss People’s Party came first in their general election. (9) In New Zealand, the centre-right National Party won their general election. (10) Departed: Bobby Charlton – English 1966 Football World Cup legend; Li Keqiang – former Chinese Prime Minister; Matthew “Chandler” Perry – American actor.   III – November PREVIEW: The most important first November week is already behind us, with a dovish FOMC, in-line AAPL earnings and weak jobs data.  This week we have Powell speaking and the Xi-Biden meeting at the APEC Summit in California. Next week we have Government Shutdown risk, inflation data and the Argentinian election (which if the libertarian Milei wins, could be transformational). During the fourth week we have the critical NVDIA earnings, the UK autumn budget and Thanksgiving. In the last week, Sweden will officially join NATO.  So, “long bias” in November, but keeping a paranoid eye on the Middle East. Figure 3: Relevant Upcoming Events in November 2023, Source: Macro Eagle, November 2023 IV - On “10/7”: This topic is complex and emotional, which makes it tricky to discuss from a pure risk-management perspective. But as an investor you need a plan to then measure events against it. Below my top 10 thoughts in an oversimplified format of BEFORE, NOW and AFTER.  On the BEFORE. (1) Complacency: only a few days before 10/7, US national security adviser Jake Sullivan declared the Middle East, as being ‘quieter today than it has been in two decades’. For this I largely blame … (2) Technology: the “smart fence” gave Israel the illusion of security, when in fact it increased its vulnerability. A lesson for all, everywhere. (3) Strategy: Netanyahu thought he could ignore the Palestine question by first normalising relations with the Arab world. Hamas blew this fiction up spectacularly.  On the NOW, military operation. (5) The national imperative for Israel is the re-establishment of deterrence. Given that “deterrence by denial” (fence) has failed with Hamas, there is only “deterrence by punishment” left. (6) Meanwhile, two US aircraft carrier groups keep Iran/Hezbollah from engaging and Israel from launching a pre-emptive attack against Lebanon. (7) Time runs against Israel, as  economics and the shift in global public opinion only give it a few weeks to hit Hamas as hard as they can, after which they will have to think about “what’s next”.  The AFTER (political solution). Paradoxically, I do think the savagery of 10/7 and the suffering caused by current campaign could finally lead to a lasting (two states) solution. Why? (8) Netanyahu will have to go – just like DefMin Moshe Dayan after 1973. (9) If Hamas is gone, there could be a geostrategic opening for the Gulf States to step in as peacemakers, taking over the administration of Gaza under some kind of UN-mandate. (10) Europe, especially France and the UK, are worried about a spillover of this mess into their own domestic politics/security, so will be highly supportive. Bottom line: this could go either way, but I do think Tel Aviv is aware that they need to both win the War and the Peace (would love to hear your view - if you have one) Figure 4: Overview of War Scenarios between Israel and the Hamas, Source: Macro Eagle, November 2023 V – On US YIELDS: Given their importance for daily cross-market moves, here again my view on US yields: (1) “normal” US 10y yields should be at 5% = 2% growth + 2% inflation + 1% term premium. (2) Inflation will be sticky due to new realities, such as demographics/labour-shortage, cost of climate transition and geopolitical friction. (3) The term premium reflects the need to attract marginal buyers to a deluge of new debt issued by a US government that is running a budget deficit of 7% in peacetime while the economy is growing 5%. (4) Meanwhile, the largest foreign buyer of US debt, the Bank of Japan, just de facto ended its yield control policy, which ceteris paribus means less buying of Treasuries in the future. (5) The recent drop in bond yields and sharp rally in equity markets leads to easier financial conditions, which the Fed will be forced to counteract with words and deeds.  Bottom line: long-term US yields are staying in the 5%-postcode for longer.  Get used to that. Figure 5: US Financial Health, Implied Fed Fund Rate, and Inflation, Source: Macro Eagle, November 2023 VI – On CORPORATE credit differentiation: The paradoxical thing about “high for longer” yields is that in the medium-term they should be productivity enhancing, as the hurdle rate for profitable projects goes up and zombie companies fall away. The problem of course is the short-term, when that transition takes place. Which is way growth matters. The latest job figures and bankruptcy filings (see below) tell us that the economy is slowing, which means we will soon see strong differentiation between companies that can weather the storm of high yields and falling growth … and those that can’t. Not even Biden with his bias to put the “metal to the pedal” through fiscal stimulus (= blowout GDP today, recession tomorrow) will be able to do much more, given the sky-high deficit he is already running.  Bottom line: Bond yields was the story of 2022/23. Credit risk will be the story of 2024/25. Figure 6: Transition Period from Short- to Medium-Term Impact of Credit, Source: Macro Eagle, November 2023 VII – On EUROPE: I recently had a chat with an American friend about European equities. They are cheap (left graph); and if you exclude the “Magnificent 7” would be beating the US market this year. What I found odd was her argument against Europe: lack of innovation and debt problems. What? (1) Europe’s innovation happens to be in the sciences, medical and materials sector, see Covid vaccines and GLP-1. (2) On the debt front, even Greek government debt yields is trading below US yields and no potential presidential candidate in Europe is suggesting to default on their sovereign debt – as Trump did in May.  (3) Europe doesn’t have the Magnificent-7 concentration risk. (4) Europe has a plethora of political economies that trade quite differently. Italy, for example, is up +20% YTD, while Switzerland is flat (right graph).  Bottom line: Europe is complex and with an image problem, but with enough great companies that produce stuff the world wants. Figure 7: Comparison of US and Chinese Markets to Europe (and Major Economies of Europe), Source: Macro Eagle, November 2023 VIII – PORTFOLIO: November has an excellent seasonality track record and I do respect that. So we reduced our hedges coming into the month, which was indeed helpful during the first week of short-covering. For the rest of the month, I’m on tactical data and Middle Eastwatch, but with a long bias.  Strategically nothing has changed: long a hand-picked portfolio of equities with solid management, a profitable underlying business and hopefully some kind of moat. Against it a (reduced) number of tail-hedges just in case somebody somewhere goes ‘tonto’ or the marginal US Treasury buyer suddenly goes on strike.  Geographically, apart from Europe, I love what is going on in Japan. I do think China has bottomed, but don’t necessarily think it will rally. There is some interesting picking in the Middle East, if my base case plays out. As for the US, keep an eye on ‘economic surprises’ and the performance of the Magnificent-7. Figure 8: (left) Fear & Greed Index, Citi US Economic Surprise Index & the Performance of the “Magnificent-7” US Stocks, Source: Macro Eagle, November 2023 I wish you all a great NOVEMBER and may THE MARKET BE WITH YOU !!! Bobby   The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer. Bobby Vedral MacroEagle E : [email protected] M: +447899996595   Bobby is a macro-political analyst who runs his own fund MacroEagle. He is also the UK representative of the German Economic Council (Wirtschaftsrat Deutschland) focused on the German-British relationship post-Brexit. Bobby left Goldman Sachs in March 2018, where he was a Partner and Global Head of Market Strats. His previous responsibilities included Systematic Trading Strategies, eProduct and FX/EM Structuring. In his external functions he was Member of the ECB's FX Consulting Group. Before Goldman Sachs, Bobby worked at Deutsche Bank and UniCredit/HVB.   This perspective is neither an offer to sell nor a solicitation of an offer to buy an interest in any investment or advisory service by Stone Mountain Capital LTD. For queries or for further information around our research and advisory services please contact email: [email protected] under Tel.: +442037228175. 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