Head of Saxo Strats
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.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
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.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
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.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
