Equity rally has stopped for now
Head of Equity Strategy
Summary: In today's equity update we highlight that macro numbers are doing the best this year against expectations and that it could support equities. Once again we highlight DAX and Nikkei futures as the markets with most momentum as these markets are high beta plays on the global economy. India has been a darling for years but recently growth has come under severe pressure and we highlight the fact that India's equity valuations seem disconnected from macro reality. Finally we focus on Ford Motor that had its debt downgraded to junk status by Moody's.
The equity rally seems to have stopped as equities did not extend gains in Asia session. It seems investors are waiting for the important ECB meeting on Thursday before adding more risk. Recent macro developments do not warrant risk-off here, so our short-term view remains that equities are bid, but longer term our forecast is that the global economy is likely to slip into a recession unless we massive stimulus from both monetary and fiscal policies on top of some US-China trade deal.
Economic surprise index is likely turning positive
The entire year has been a one-way street on bad macro numbers against expectations but luckily for investors that has not spilled into bad returns. Centrals banks made a historic U-turn back in January and February which has elevated risky assets and now macro numbers are no longer disappointing against expectations as measured by the Citi Economic Surprise Index on the G10 countries. The index is likely to push into positive territory very soon and the macro momentum is strong relative to expectations. This could extend the rally in equities.
Nikkei futures still look the strongest on JPY flow
As we have been highlighting the since late last week the DAX and Nikkei futures look the strongest on price momentum. Both equity markets are high beta plays on the macro economy so if risk-on continues these two markets would likely see further momentum. In today’s session Nikkei futures looked relatively strong against a backdrop of more mixed equity markets in Asia. The move is partly currency flows weakening the JPY but also rising sentiment on the macro economy.
Is India a train wreck about to happen?
For years investors have been in love with India. The world’s largest democracy had positive demographics and a low urbanization rate setting the country up for decades of super growth. Everyone piled into the country’s equities getting good returns in both local and foreign currency. But recently the growth engine as been sputtering with news yesterday that car sales in India had it worst ever fall in August down 24%.
On top of that, India’s banking sector has eclipsed Italy as the world’s worst bad-debt pile. We are potentially watching a credit crunch in the making. More strangely is it to see equity valuations in India with MSCI India Index valued at 1.5% dividend yield which makes Indian equities much more expensive than US equities which are already expensive in a developed market context.
Stocks to watch
Ford Motor is in focus as Moody’s downgraded the carmaker’s credit rating to junk status as cash flows and operating margins are expected to remain weak the next two years. It obviously bad for Ford Motor which has been struggling with a weak share price the past five years. The downgrade means higher financing costs which come at a bad time as the economy may slip into a recession within the next 12 months and the car industry is seeing increasing capital expenditures to fund the transition to electric vehicle technology. The company’s debt has a current credit default swap price of 183 basis points which is in line with Bloomberg’s default model. The 1-year default probability is 0.29% which at levels not seen since 2012.
Apple will announce at 17:00 GMT its 13th iteration of the iPhone which is seeing slowing demand. The company is getting around 50% of its revenue from the iPhone so it’s an important event for Apple investors to watch. But Apple understands future growth is not coming from the iPhone but its Services segment (essentially digital sales) and its streaming business in TV and music.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.