Chief Investment Officer
Summary: US equities rallied in nearly vertical fashion yesterday, tacking on over four percent of gains and taking the major tech stock index, for example, all the way to it late December levels. Clearly, the mantra of Never fight the Fed is afoot. But we note financials and small caps have badly underperformed, a sign of a Wall Street versus Main Street narrative in this Covid19 crisis.
Main street versus Wall Street, that is the narrative here after the incredible rally extension for the big name tech stocks, and risky, highly levered companies like Tesla over the last couple of sessions, all seeming to enjoy the “Don’t fight the Fed” mantra. Meanwhile, banks are underperforming and small caps with less access to the Fed’s liquidity H-bombs have retraced only some 35% of the losses from 2020 highs.
What is our trading focus?
What is going on?
Dash for trash? – it should be noted that many of the US equities rising the most in this latest short squeeze or rally, depending on your point of view, were high risk names like AMD and Tesla, Inc. This could be a sign of heavy small trader involvement in this rally, a contrarian signal.
Covid19 – some European car manufacturers have declared plans to open factories across Europe in coming weeks. Us President Trump withdrew funding from the World Health Organization, saying that is failed its basic duty and is too reliant on China. In the USA, the US saw its single deadliest day of Covid19 deaths, with over 2,400. There, US President Trump maintains the opinion that the Federal government can declare when the US should re-open for business, but the governor of the US’ most populous state, California, declared a cautious agenda of steps, like testing and contact tracting, that must be followed if activity is to normalize in there.
Australia April Consumer Confidence – dropped to the worst reading ever at 75.6 and thus below the worst level of the financial crisis of 79.1.
What we are watching next?
The mood in Europe – as we note above, the Italy-Germany yield spread widened badly yesterday (by over 20 bps to 216 bps total) in the first trading day in Europe after the Eurogroup deal was agreed late last Thursday. Italy’s premier Conte spoke out against the deal agreed by his own finance minister and claims that the country will never accept funds from the ESM, the main portion of the agree package. An EU existential crisis is simmering until proven otherwise.
The crude oil market remains under some considerable pressure as recent supply cuts have done little to off-set the historic slump. Focus today the weekly stock report from the EIA, Monthly Oil Market Report from the IEA and whether Texas oil regulators will order a 20% cut in shale oil production.
US Retail Sales today and US earnings report and how the market treats specific news a well as the “Don’t fight the Fed” narrative.
Economic Calendar (times GMT)
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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