Summary: The US equity market rolled over and sold off yesterday, or at least the big names and major indices posted a rather poor session, while other pockets of the market that were formerly weak are suddenly strong, such as small caps and value names. Elsewhere, the USD firmed again and the Canadian dollar rallied on the Bank of Canada surprising with renewing its policy tightening regime and guiding hawkish.
US equities yesterday and this morning S&P 500 futures are continuing lower trading around the 4,267 level. The recent rejection twice of the 4,300 level indicates that momentum might exhaust here. As we wrote in yesterday’s equity note the S&P 500 index concentration has reached a new all-time high with the 10 largest stocks representing 30.4% of the index. This is a key risk for the equity market as the slightest change to sentiment in technology stocks will send the US equities 5-10% lower. Another key risk is that the equity market is still unprepared for higher inflation and interest rates for longer with equities barely reacting to yesterday’s significant move in the US 10-year yield that got back to the 3.8% level.
The Hang Seng Index, managed to recover early losses and trade slightly higher, driven by a rebound in the share prices of Chinese developers. Country Garden (02007:xhkg) saw a significant jump of 7%. Additionally, Trip.com (09961:xhkg) surged over 4% following strong financial results, which exceeded market expectations. In other news, the five largest state-owned banks in China lowered their deposit rates by 5bps to 15bps points across various maturities. During a financial forum held in Shanghai, key figures in the Chinese financial industry expressed their support for its development. Li Yunze, the chief of the National Financial Regulatory Administration, and Yi Huiman, the Chairman of the China Securities Regulatory Commission, both sent out positive messages affirming their commitment to the growth and advancement of the Chinese financial sector. Meanwhile, the CSI300, another major stock market index in China, recorded a gain of 0.6% at the time of writing.
The Bank of Canada took a page from the RBA playbook and surprised hawkish (more below) with a rate hike yesterday and also issued hawkish guidance on continuing the fight against inflation. This shocked CAD higher, although some anticipation of a hawkish turn limited the gains for the loonie. Elsewhere, the USD rebounded from weakness during yesterday’s session on a rise in treasury yields all along the yield curve and as risk sentiment soured badly in the US equity market. NZDUSD was the underperformer as it plunged to lows of 0.6031, likely also weighed down by AUDNZD flows. USDCNH rose to YTD highs of 7.1533. The Turkish lira experienced its largest fall since late 2021 after president Recep Tayyip Erdoğan’s new finance minister’s pledge to restore “rational” policies. The currency dropped to a record low of 23.4 against the USD.
Crude oil prices edged higher on Wednesday, supported by strong China imports last month and after weekly EIA inventory data showed refinery utilization at its highest since 2019, signalling expectations of a strong summer demand. The recovery, however, was halted after the surprise Bank of Canada rate hike raised the prospect of more tightening at a time where the softening demand outlook remains a key focus. Putin and the Saudi Crown Prince in phone conversation praised the OPEC+ cooperation and the group's ability to maintain a balanced market. Whether Russia’s not yet fulfilled production cut promised was discussed was not mentioned in the statement. During the past month, WTI has been averaging $75.6 and Brent $76, not far from current levels and it highlights a market that awaits clarity on the demand outlook.
The surprise decision by the Bank of Canada to restart its rate-hiking campaign triggered a sharp move lower in gold on Wednesday as bond yields rose, and traders raised bets on a July rate hike followed by just one cut before year-end. Yet the announcement was not enough to send gold out of the recently established range where prices have been hovering around $1950. Overall, it highlights gold’s current data dependency given their impact on short term rates and with that the timing of a gold supportive peak rate scenario. The upside remains blocked by the 21-day moving average, currently at $1969, and then the recent highs around $1985. Support can be found in the $1930-35 area.
The RBC followed the example of the Royal Bank of Australia and hiked rates to fight stubborn inflation. Two and five-year US Treasury yields rose by 12bp by the news as investors began to price a full rate hike in July. At the same time, the Treasury sold $46bn in 4-month T-Bills at a high yield of 5.20%. Despite Ray Dalio's warning about a debt crisis with too much debt and insufficient buyers, demand for yesterday's T-Bill was extremely solid, with a bid-to-cover of 3.36x versus an average of 2.84x in the past six auctions. Today the Treasury will issue $60bn of 4-week bills and $50bn of 8-week bills.
Despite the BOE successfully ending its corporate bond sale program on Tuesday without much ado, Gilts remain vulnerable to a hawkish tilt in monetary policies. We still see scope for 2-year yields to soar to test resistance at 4.68%. It's unlikely rates will soar to break 5%. As yields rise towards the 5% level, the financial sector will begin to suffer, as happened last September during Truss' mini-budget crisis. Therefore, the BOE must rescue, limiting rates' upside to avoid a financial crisis.
The final print of Japan’s Q1 GDP saw a large upward revision to 0.7% sa QoQ from 0.4% flash print and 0.5% expected. The YoY print came in at 2.7% from 1.6% flash and 1.9% expected. Q4 GDP growth was flat QoQ and +0.1% YoY. While private consumption was revised a notch lower for Q1, most of the upward revision came from higher business spending. The Japanese yen showed a minor gain on the report to drop back below 140 but policy tightening still remains a far-fetched idea for Bank of Japan.
Stan Druckenmiller told Bloomberg's Invest Conference that "this is the most complicated non-roadmap, unanalysable situation I've ever seen in terms of having a lot of confidence in an economic prediction going forward... I just don't see a fat pitch right now. Our central case is there's more shoes to drop, particularly in addition to the asset markets economically." He was positive on AI and said his firm owns Nvidia and Microsoft, especially hinting at a 2-3 year time horizon for Nvidia. He said that “unlike crypto, I think AI is real... If [AI is] as big as I think it is, Nvidia is something we're going to want to own for at least two or three years. Not for 10 months.” While AI presents a whole lot of opportunities, investors should also be aware of some key risks. Watch Saxo’s video on how to avoid the AI hype to know more.
The Bank of Canada surprised consensus with a 25-bp rate hike yesterday, taking the policy rate to 4.75%. Recent strength in the Canadian dollar and rising rates at the short end of the Canadian yield curve had the market on watch for a possible rate hike, but most were leaning for a move at the July BoC meeting. The new monetary policy statement featured stern language on fighting inflation and noted a recent rise in house prices and “interest rate sensitive goods”. On inflation, while the statement noted that it felt inflation had peaked, it still felt that sticky core inflation is a concern: “However, with three-month measures of core inflation running in the 3½-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target.” Two-year Canadian rates jumped some 20 basis points yesterday, while CAD gains were moderated by weak risk sentiment. Another 40 basis points of tightening is priced through the December Bank of Canada meeting.
According to an FT article, US, Taiwan and Japan could be set to share real-time data from naval reconnaissance drones, likely as part of scenario planning for a Chinese invasion of Taiwan, with the US set to deliver state-of-the art maritime military drones to Taiwan. This would inevitably bring rhetorical pushback from China. In other news, US Secretary of Staten Anthony Blinken is likely set to visit China in coming weeks after a previously planned visit was cancelled due to the Chinese spy balloon incident.
The Direction 20+ Year Treasury Bull 3X (TMF:arcx) more than doubled its assets as investors bought it amid speculations that the Fed is done with its rate hiking cycle. Yet, it returned only 2% YTD, while it plunged 73% in 2022, showing that the strategy didn't take off yet. On the contrary, the Ultra Short 20+ Year Treasury ERF (TBT:arcx) suffered from the worst outflows showing that there might be little downside in US Treasury still.
The more concentrated energy becomes in a system the more fragile it becomes to adverse changes so the fact that the 10 largest stocks in the S&P 500 now have a combined index weight of 30.4% is a very bad sign. It tells us several things. First, it shows that competition is going down in the US economy. Second, it shows that the US equity market offers less and less diversification thus inherent risks to a smaller set of risk factors. With technology stocks being so dominant in US equities sentiment changes and thus the underlying risks are much higher than what is signaled in the VIX Index.
Next earnings release to watch is DocuSign reporting earnings today after the market close with analysts expecting FY24 Q1 (ending 30 April) revenue growth of 9% down from 26% a year ago reflecting the ongoing decline in corporate technology spending. Adjusted EBITDA is expected at $156mn up from $2mn a year ago.
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.
