The global set up is relatively more cheerful this week but there are some key concerns. Geopolitical worries have taken centre-stage. While the latest round of talks amongst the European leaders ended without a common view on resolving the Ukraine conflict, Chris Wood, Global Head of Equity Strategy at Jefferies, in the latest ‘GREED and fear’ report highlighted Ukraine as a key worry along with gold and inflation.
Ukraine crisis: Solution in sight?
Referring to the Ukraine issue, Chris Wood quoted Donald Trump, “This war MUST and WILL END SOON” and said that “clearly resolution of Ukraine, along with revision of the German debt brake, are two catalysts that could trigger continuing outperformance of European stocks.”
The MSCI Europe has outperformed MSCI AC World by 6.8% since late December. According to GREED and fear report, they believe that after Trump’s 90-minute phone call with Putin, the “Ukraine story is back front and centre. Clearly, Trump has not focused on it in his first three weeks in office, prioritising Gaza instead.”
According to him, “Russia would have agreed a deal at any time in the last three years for a simple guarantee that Ukraine will not join NATO. Still, Trump’s conversation with the Russian President suggests GREED & fear that he has rejected this line of thinking since it will only perpetuate continuing loss of life in a war which Russia should ultimately win based on the law of numbers.”
According to the report, Trump’s comments and US Defense Secretary Pete Hegseth’s comments indicate that “a deal would not be based on Ukraine’s pre-2014 borders. This is a conflict for which the resolution “will not be easy” and less likely to project as a “win” for “Ukraine or indeed NATO since Russia is not, in GREED & fear’s view, going to exit Crimea or indeed much of Donbas.” It highlights that it would be better from a political perspective, “for Trump to negotiate a resolution quickly and blame the Biden administration’s policy of ‘fighting to the last Ukrainian’.”
Meanwhile, the report highlighted that if “leverage can be applied on Moscow, as regards Ukraine, that would have to be from Beijing not Washington.” Meanwhile, GREED & fear recommended “global investors to increase their weightings in both Europe and China.” “GREED & fear has 12% and 16% of the global long-only equity portfolio allocated to Europe and China respectively. As for Europe, it already made sense to increase exposure based on the debt brake revision catalyst. But the latest Ukraine newsflow has increased the case for allocating more to the old continent.”
Gold shining bright
The other key global factor that the GREED & fear report referred to is the continuous rally in gold. The gold rate today in India is just a tad lower than the all-time highs of 88,000/10 gm hit last week. It has been hitting “new highs this week in spite of a complete lack of retail investor interest in the US, as reflected in the lack of ETF inflows in spite of the dramatic price action,” observed Chris Wood in the report. He quoted Bloomberg data to indicate that “gold holdings by ETFs have declined by 843 tonnes or 24.4% to 2,611 tonnes currently from the peak of 3,453 tonnes reached in October 2020. However, this is up by “106 tonnes or 4.2% from the low of 2,504 tonnes in mid-May 2024.”
The report observed that the latest data from the World Gold Council shows an “increase in central bank buying in the fourth quarter.” Central banks bought a net 333 tonnes of gold in Q4 of 2024, up from 194 tonnes in Q3 of the same year and a net 1,045 tonnes in 2024, after buying a net 1,051 tonnes in 2023 and a record 1,080 tonnes in 2022. “Central banks have now been net buyers of gold to the tune of 3,093 tonnes since the US seizure of Russian foreign exchange reserves in late February 2022 with the outbreak of the conflict in Ukraine.
GREED & fear repeats the point that that event marked a breakdown in the longstanding negative correlation between US real interest rates and gold bullion. For related reasons, gold has been able to keep rallying despite a strong US dollar,” it added.
Inflation & rate easing by US Fed
The GREED & fear report expects that “US inflation will settle structurally higher.” The report highlighted that US headline CPI rose by 0.5% MoM and 3.0% YoY in January, above the consensus estimates of 0.3% MoM and 2.9% YoY.
“Unsurprisingly, the bond market sold off on the news with the 10-year yield 95bps higher than when the Fed commenced easing in September, 2024,” explained Woods and added that the “money markets are still assuming renewed easing later this year, as is GREED & fear, even if this week’s data has further confirmed a Fed on hold. The Fed funds futures now expect 30bp of rate cut by the end of 2025”
As for the Treasury bond market, “the base case remains that it is in a structural bear market. Still investors need to keep a close eye on what is going on with Elon Musk at DOGE. If he stays in Washington for six months he can do a lot,” observed Chris Wood in his detailed analysis of the evolving global dynamics.