Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Jessica Amir
Market Strategist
Summary: April historical brings hope to markets, but clients are playing the defensive game, topping up their bond exposure in case of a recession. Across the entire industry $304 billion has flown in money market bonds over the last three weeks. This weeks economic data could be a catalyst for Q1 market darlings, such as high PE semiconductor stocks, to take a haircut. And why consumer spending stocks will be in focus.
After end of quarter and end of financial year in Japan, we’re turning the page to Q2 and a new month. April is historically the best month for equites. It is typically attributed to the excess profits or cash being put to work, that was taken off the table from end of March quarter rebalancing.
In Q1, the Economic Surprise Index hit a new high with data coming out better than expected, with inflation continuing to slow. So, we’ve seen the risk-on trade amplify. The Nasdaq 100 gained about 19% in the first quarter. While in Commodities, the iron ore price rose the most, 10%, outpacing gold, as China’s reopening narrative gained pace with the Chinese government introducing more stimulus. In FX markets, the most talked about trade in Q1 was the Euro against the USD, with stubbornly high EU inflation giving the European Central Bank more room to hike than the Fed. In terms of the major equity themes; semiconductors have been driving markets higher, and are up 23% YTD. Nvidia shares are up 90% in three months.
Reflecting on the most purchased ETFs globally now, across the entire industry, quality ETFs have gained the most flows, with QUAL taking in $7.3 billion of flows in Q1. What’s interesting is, the biggest positions in the QUAL ETFs are with Microsoft, Apple, Nvidia, Meta, and Alphabet. Secondly, with investors hunting for stable returns, $6.1 billion has flowed into the 7-10 year government bond ETF IEF.
Stepping back even further, across the entire money market, amid the bank sector turmoil, we’ve seen large withdrawals of cash from bank deposits, with money instead being channeled into bond markets, with $304 billion flowing into bonds just over the last three weeks, as investor seek better returns for their cash component of their portfolio.
This week, markets will be tracking recessionary risk, with the US manufacturing and services PMIs indicators out. Manufacturing will likely to slip further into contraction, while the US services PMI is expected to weaken.
US jobs data will also be a focus. If it shows stronger jobs data, as in the US economy can withstand more Fed hikes, then equities could give back some gains. Specifically, watch indices that are more expensive that the global average, with the MSCI World Index’s PE of 17. So keep an eye on the Nasdaq, given its price to earnings (PE) is 35 times. It could be pressured if eco’ prints are hot. Semiconductor stocks could be more vulnerable of a haircut, as their PEs are quite high and their stocks have made strong gains. For example, Nvidia shares are up 90% this year, and it has a PE of 120 times earnings. AMD’s shares are up 51% YTD, and its PE is 85 times.
Secondly, the RBA and RBNZ interest rate decisions will be watched. If the RBA is more hawkish and backflips from its dovish tone, then the AUD would whip saw higher. The market has priced in rates will stay at 3.6%, given headline CPI and the Melbourne Institute’s gauge showed CPI also slowed. But most economists expect a hike. For more considerations ahead, read our article.
Earnings releases are thin, ahead of earnings season kick off mid-April. Beer brewers could be an interesting sector to watch, with the third largest brewer, Constellation Brands reporting Thursday. It sells brands such as Corona and Modelo, and its earnings are expected to drop amid household disposable incomes being stressed, while higher marketing and packaging costs are expected to weigh. Its results could impact sentiment in other brewers, such as the global giant, Anheuser-Busch InBev, as well as Kirin Holdings.
Outside of earnings Walmart's investors day will be focus as it might divulge insights into the state of the consumer. Its outlook could also cause waves in consumer spending stocks. Walmart is expected to map out its long-term growth outlook targets, as well as cost-saving initiatives and additional revenue streams, which could boost its earnings per share.
Stay tuned to analysis.saxo for daily updates, and inspiration.
For a detailed weekly report, tune into our Spotlight report.
For a global look at markets – tune into our Podcast.