30 May 2022 - Best week since November 2020 for US equities



US equities zoomed higher by almost 7%, for the best week since November 2020, back when the Covid19 vaccine news sparked enthusiasm in financial markets. The fact that the S&P500 held twice the important 3850/70 levels, as we had mentioned before, gave the opportunity to traders to aggressively bid stocks h higher. The move should be considered more technical than a change in direction, but for now equity markets look to have bottomed. There were many catalysts for this (rather expected) relief rally: a) margin debt had fallen significantly, as the “weak” hands have been wiped out of the market, b) extreme pessimism among the investment community, which is usually a contrarian indicator, c) cash held at funds had risen to record highs. One should expect the S&P500 to attempt a rise towards 4250/4300 in the coming weeks.


Consumer Discretionary (the likes of Amazon, Starbucks, Nike etc.) was the best performing sector. As mentioned in a recent KSH report (press here for link) shares of this sector had already discounted a mild recession, without even having the first signs of it.


The minutes of the last FED meeting did not show any surprise. Most of the members favored the 0.50% increase in rates, while the consensus seems to be that the central bank should raise rates until what is considered a “neutral rate”. There is, of course, a big debate on what this neutral rate is, but there seems to be an agreement that it is between 2.5% and 3.0%. The market now does not discount a move beyond this area this year and until the situation in inflation and the economy is assessed. It seems that we are past the peak of “interest-rate-phobia”, a fact that is providing some calm to markets.


The economic slowdown in the US, and in Europe seems to be underway, which is exactly what the central banks wish to do in order to tame inflation. The first quarter US GDP growth was revised lower to -1.5%, while New Home Sales dropped much more than expected. This is normal, as the mortgage rate has risen to almost 5.5% vs 3% at the start of this year.


The April PCE deflator index (which is the FED’s favorite inflation metric) rose by 6.3% on an annual basis, down from 6.6% in March. This figure gave some hope to investors that we have probably seen the peak of inflation in the US.


The May Eurozone PMI (Purchasing Managers Index) dropped as expected. The Services component was announced at 56.3, down from 57.7 in the previous month, while Manufacturing fell to 54.4 from 55.5. However, both metrics are sitting comfortably above the 50 level, which usually signals whether a recession is coming in the short-term.


China is proceeding with lifting the lockdowns in various regions. According to local reports, shopping malls in Shanghai are opening again, while schools are also expected to open this week. There is also speculation that President Biden is considering lifting some tariffs imposed on China during the Trump years, but nothing specific has come out yet.


In corporate news, JPMorgan raised its guidance for its revenues this year, helped by the rise in interest rates. The first layoffs in the Technology sector are being announced and Microsoft became the last company to announce a slowdown in hiring. Unemployment is expected to rise.


Equities: Weekly Performance

 

Charts of the Week


Extreme fear usually marks the bottom

This is a chart of a metric which measures the levels of fear or euphoria among traders in the US. Last week it plunged to levels of extreme fear last seen in the big financial crisis of 2008/2009. The bottom of that bear market was in March 2009 and a major rebound occurred. Similarly, this week we saw a big rally in the US equities, which seems to have confirmed a short term bottom in the markets. This does not mean that we are completely out of the woods, but it illustrates that selling in panic mode when everything looks bleak is not the best thing to do. It also illustrates that even in bear markets there are tradeable rallies which can provide to courageous traders/investors significant short-term results. On a more fundamental note, the levels we saw before last week continue to offer attractive opportunities, under the scenario of a mild and short-lived recession. Make no mistake. A slowdown in the US economy is coming. But the levels of the final market’s bottom will be determined by how deep and lasting this will be.


The EURUSD rebounded from the lows of the decade

Forecasting where the EURUSD will be in the coming months is not something that we would be engaging ourselves with, as FX trading is usually a zero-return game. However, history can shed some light of what might happen next. The EURUSD reached the low of 1.04, which was last seen in 2016 and similar levels during 2015. When everybody back then was talking about reaching parity in the following weeks (ie. 1:1 with the USD), the EUR rallied to the 1.20-1.25 levels. A similar action occurred during the pandemic, when it reached a little higher low of 1.07, only to jump back to 1.20 within less than a year. Last week we saw a major rebound from the low of 1.04 to almost 1.08, as the sentiment improved in financial markets. If we have seen the peak of the market’s fear about an aggressive FED policy, and equity markets begin a gradual recovery, a move above 1.10 and even closer to 1.15 cannot be ruled in the coming months. This is not a forecast, but rather a calculated guess based on past experience.

 

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Equity performace: Factshet, Chart 1: Kepler Chevreux & Chart 2: Factshet