The Middle East’s impact on markets

Federated Hermes' Porfolio Managers address the impact that the situation in Middle East is having on the markets. The latest news has increased volatility and market participants are taking a 'more cautious tone'.

Is the market exhausted with AI?

Louise Dudley, Portfolio Manager for Global Equities at Federated Hermes

Geo-politics has given much pause for thought over the past few weeks, but investors are forcing the big scary elephant in the room into a box for now as earnings season kicks off cautiously and inflation readings continue to haunt the market.

AI continues to dominate headlines as concerns over machinery orders sent chips lower, and a positive beat in chip manufacturing wasn't able to drive the market enthusiasm we are becoming used to around AI. These results haven't caused a dent in the AI thesis, but they do perhaps highlight the risk of market exhaustion with the AI theme.

Inflation continues to be at the forefront of everybody's mind and will compete with earnings announcements to dominate the headlines. For now, it's clear that inflation is sticky at its current bound and controlling it is now, more than ever, the job of central banks, with monetary policy, and world leaders, with foreign policy.

We see strong balance sheets and sensible growth stories as important opportunities in this environment. The ability to weather an elevated rate environment and develop interesting growth opportunities could help to define the key players over the next decade.

OPEC+ production cuts start to pay off

Mohammed Elmi, Senior Portfolio Manager for Emerging Market Debt at Federated Hermes

The recent run up in oil prices can largely be attributed to both demand and supply side factors. The OPEC+ production cuts instigated last year, and largely shouldered by the Saudis, seems to be paying off. While non-OPEC oil production – the main disruptor to the cartel’s dominance - is starting to plateau. US production has flat lined at the November 2023 all-time high, while Russian upstream production has been weighed down lack of spare parts and logistical constraints. Although a much welcomed relief to the oil exporting Emerging Market countries through their external accounts, the Fed faced with persistently strong economic data will be keeping a close eye on energy as we enter the peak travel months of the summer.

Fear indexes soar

Vincent Benguigui, Senior Portfolio Manager for Fixed Income at Federated Hermes

Last week headlines on the Middle East brought back uncertainty to the markets. The VIX, Wall Street's so-called "fear index" that tracks the expected volatility of the S&P 500, spiked from 13 to 19 and drove equity markets into red territory. This is the highest level since October 2023 but we remain far from historical levels. However, fewer people are aware that this fear-gauging index also exists across other asset classes such as Credit and rates. The Move Index (which tracks volatility on US rate swaps) and the Vtrac-X (which tracks volatility on European Credit markets) moved by an even bigger quantum than the VIX.

If the macro backdrop has not fundamentally changed, these moves reflect an increase in volatility regime and a more cautious tone taken by market players. We believe that ‘central bank turnaround’ will remain a medium-term market driver, but we expect further market spikes in the short term due to this sudden volatility increase.