Head of Equity Strategy
Summary: Yesterday was a major reversal session with the best performing assets tanking while junk pockets in equities such as bubble stocks rallied hard into the close. A combination of breakout in the USD and commodities plunging 5% due to increased recession fears over punitive energy prices in Europe ignited a massive technical reversal in equities with long-short value and momentum style factors declining 5% during the session. In today's equity update, we also take a look at Amazon's partnership with Grubhub in the US sending Just Eat shares 20% higher.
A weird session
As we have said recently on our podcast and in equity notes the market has turned into a binary state of inflation and recession trades with latter dominated flows recently as commodities have come down together with inflation expectations. Yesterday’s session was wild with a significant breakout in USD which coupled with galloping energy prices in Europe suddenly got all commodities to flip on fears of recession with the Bloomberg Commodity Index falling 5% reaching levels from early February removing the entire extension higher following the war in Ukraine and sanctions on Russia.
Bond yields followed commodities lower and in equities flows intensified throughout the session in the direction of reversing the value and momentum trades. Value and momentum stocks have a significant overlap these days and Bloomberg’s long-short versions of these two style factors declined 4.5% and 5% respectively yesterday which is a lot for long-short style factor. In our own theme baskets the momentum reversal was revealed by the best performing baskets this year declining while the worst performing baskets such as bubble stocks shot higher. In other words, increased recession fear takes inflation and interest rates down and thus the junk pockets have to be bought.
Before anyone thinks that this is the winning strategy the next six months we would like to emphasise that the nominal economy in the US is still growing +10% y/y and the underlying structural issues on the supply side of the economy have not been fixed. July is a low liquidity month and as such we recommend investors to not put too much weight on yesterday’s move.
Amazon is warming up for food delivery
The everything store wants apparently to become the everything machine running the consumer economy. Amazon has announced this morning that it will receive a 2% option (warrants) in the US based food delivery company Grubhub, which is owned by Just Eat in Europe, in exchange for Amazon’s US Prime members getting a 1-year membership for the food delivery service. Depending on the performance of this partnership Amazon can increase its stake to 15% of Grubhub.
Shares in Just Eat, the parent company of Grubhub, are up 20% today as the market is betting that these type of partnership can reignite growth for Just Eat which is seeing increased competition. Just Eat revenue is expected to grow 32% in 2022 down from 120% in 2021 reaching €5.9bn, but the business is still not generating a positive operating income and as a result its shares have been punished during the interest rate rally.
For Amazon the economic engine is getting more and more convoluted and we do not see the big upside for Amazon in this deal. If anything it just makes the business more muddy and we still prefer that Amazon spins out its cloud business in a separately publicly listed company.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
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