Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Chief Investment Officer
Summary: The sell-off in crude oil took on fearsome power yesterday as the most liquid front contracts in both WTI and Brent suffered enormous drops. Elsewhere, we continue to watch signs of the markets mounting concerns for Italian debt ahead of the crucial EU council meeting tomorrow, where a bad outcome could accelerate gathering bearish momentum in equities after the very weak session yesterday.
Markets suffered their worst sell-off in some thirteen days yesterday, in part on concerns that the massive slide oil will drive concerns for the broader credit markets from defaulting energy companies. Next up is the EU Council meeting tomorrow amid signs of mounting existential concerns as Italian sovereign yields rise.
What is our trading focus?
What is going on?
The manager of USO, the largest oil-tracking ETF, stopped allowing the creation of new shares yesterday: This fund still holds a significant portion of front-end oil contracts in WTI futures, and to a lesser degree, Brent contracts, and significant changes to its holdings were likely a driver behind some of the freefall in prices this week, with further downside risk if the fund it unwound.
The German-Italy yield spread for 10-year sovereign debt spiked to 263 basis points yesterday, which takes it to its third-highest daily closing level this year and the highest since the ECB announced its emergency PEPP round of QE that would allow it to snap up more Italian debt than would have been allowed under the old QE rules.
What we are watching next?
Signals from EU leaders and the nature of the agreement at tomorrow’s EU council meeting – there are a number of proposed, highly technical solutions for how the EU will approach funding the massive need for supporting southern EU countries countries during this process. Our chief focus will be on the mood and signaling among leader more than the package itself and whether the meeting allays the markets’ pricing of existential concerns (spreads on EU debt, etc.).
Q1 earnings season: earnings to watch this week are Biogen (Wed), Delta Airlines (Wed), Intel (Thu), Credit Suisse (Thu) , American Express (Fri), Boeing (Fri). Next week the big focus will be on technology companies with our focus on Facebook and Google as we believe the market is not adequately pricing in the sharp decline in online advertising that has taken place. As of today 10% of the S&P 500 companies have reported Q1 earnings and EPS is down 30% y/y and revenue is up 2% y/y.
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