Not long ago, if a former president narrowly escaped an assassination attempt, or the Secretary of Defense went AWOL to undergo treatment for cancer, there would have been more empathy and messages of support, even from political opponents.
A quick update before the England-Spain Euro 2024 final kick off… We won't jinx it by making any bold predictions, especially since our recent calls haven't been the best. It has not been the best tournament, unlike the Copa America, which has been far more entertaining to watch. Prior the semi-finals, most of the Euro 2024 matches resembled AI bot simulations, where each player optimizes for a minuscule task. Like a game of chest, to be lost rather than won. They even have similar haircuts.
US Economy
There have been no significant changes to our US economic outlook since we compiled the analysis and views of Craig Reynolds, Alan Brazil, Jan Hatzius, and colleagues (GS). See our Half Time Score for a refresher. While our macro outlook remains on track, it has not necessarily translated into clear and successful market calls. Since launching the Speevr Intelligence updates more than three years ago, we have been strong proponents of owning US Big Tech stocks based on:
1. Proliferation of AI tools and services which bolster demand for cloud services.
2. Untapped opportunities for expansion into emerging markets.
3. Flexibility in tweaking products/services in existing mature (developed) markets to prioritize revenues ahead of competing priorities to meet Wall Street analysts' expectations when required.
Despite this, we also find ourselves largely spectators in the recent move higher in US stocks. It actually feels worse than having the wrong call.
Fortunately, Craig's USD curve steepener idea (disinversion) has begun to perform as 10-year Treasury yields have lagged the rally.
European Sovereign Debt
The BTP-Bund spreads continue to tighten, currently around +131 basis points (bp), leaving us 13bp offside from our initial entry point. Under more proactive risk management, we might have taken profit on half the position after the first round of the French elections with an eye to reenter the trade at lower levels. In the grand scheme of things, it is inconsequential and may even later prove to be counterproductive, creating the false pretense of owning bad risk at a good level. Often the final P&L outcome is the same regardless of the size of a position, entry/exit points, and actions taken in between.
We initially described the BTP-Bund spread as a 5/1 shot with a 9/1 payoff; it is currently more like 13/2 and 9/1, respectively. Still a net expected positive return. However, we also noted that low probability-high impact events are not feasible scenarios for most market participants to speculate on. In practive, hedging portfolios against many tail risks with less than a 10% probability of occurrence is almost guaranteed to lead to persistent underperformance. The choice is to mitigate against the risk of a European sovereign debt crisis, a US recession, or a China slowdown—not all three. At present, we judge negative risks to be higher in Europe than in the US. Yes, despite the ongoing US political shenanigans.
Hamas-Israel
Over the weekend, the IDF launched strikes on Khan Yunis in Gaza, targeting Mohammed Deif—leader of Hamas' al-Qassam Brigade. The attack is reported to have killed more than 70 people and injured many more. Hamas officials reported that Deif is “alive and well.” This was probably the 8th assassination attempt on him since 2001. Until recently, Israeli intelligence believed Deif was severely crippled in past assassination attempts.
Unsurprisingly, Hamas announced it will withdraw from the ongoing ceasefire talks mediated by the Qataris and Egyptians. As former PM Naftali Bennett recently said, the status quo state of limbo presents the worst of both worlds for Israel, as the IDF has further dialed up the intensity of its operations in Gaza. Hamas is reconstituting and regaining control of the strip while the hostages remain in captivity. This is much as Mossad Chief David Barnea hinted just before the ceasefire negotiations fell apart in February/March.
Otherwise, we have not made any updates on the conflict since we do not see any meaningful developments to break the deadlock. The planning and plotting continue by all the key actors in the region regardless. There are reports that backchannel negotiations in Amman are ongoing between the US and Iran—not only concerning Iran's nuclear program but also the war in Gaza.
Dubious Lancet Report on Gaza Casualties
A report published in The Lancet medical journal suggests excess fatalities in Gaza since the start of the war could be around 186,000, well above the 37,000 currently reported by Palestinian Health authorities. After a quick glance at the analysis, we suspect the article will be redacted at a later date, as was the case for a dubious study published during the COVID pandemic advocating for Remdesivir as a cure. There's a lot of pseudoscience which gains legitimacy through close affiliations with reputable institutions. We've encountered shoddy statistical analysis which overplays or underplays the casualty numbers in Gaza. This achieves little in the way of persuasion and gradually erodes trust in institutions and experts.
While we have been highly critical of the IDF's prosecution of the war in Gaza, most now finally agree it has been a failure. Flimsy analysis should be called out for what it is.
Updates
A couple of corrections and additions to the previous update:
—Hamas has announced it will continue ceasefire negotiations with Israel.
—Israeli intelligence officials are growing increasingly confident that Mohammed Deif was also killed in this weekend's strikes on Khan Yunis. The theory amongst the Israelis is that Hamas will, for now, keep the loss of Deif a secret and continue with business as usual. Given past intelligence failures related to Deif, we would take it with a pinch of salt until US counterparts corroborate their claims. Yahya Sinwar was also supposed to have stepped down several months ago while Hamas in Gaza searched for a new leader. Israeli media, and especially the local Hebrew press, have lived in their own alternative reality since October 7.
—Congratulations to Spain and Argentina, and commiserations to England and Colombia fans. In the case of Spain, the best team in the tournament and on the day came out on top.
