A close call for the COVID-era bull market

The Daily Shot: 23-May-22
Administrative Update
Equities
Credit
Rates
Commodities
Energy
Cryptocurrency
Emerging Markets
China
Asia – Pacific
The Eurozone
The United Kingdom
The United States
Global Developments
Food for Thought



 

Administrative Update

The Daily Shot will not be published next Monday, May 30th.


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Equities

1. Global sentiment shifted to “risk-on” this morning as the Biden administration reviews the current US tariffs against China. The Aussie dollar, which has been correlated with equities is up sharply.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
2. The pandemic-era bull market came very close to officially ending on Friday. The earnings report from Deere spooked investors.
 

 
Source: Bloomberg   Read full article  
 
But dip buyers stepped in during the afternoon session. These near-bear-market close calls are not that uncommon.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
Bear market news stories spiked last week.
 

 
Investors expect more pain ahead.
 
Source: Bloomberg   Read full article  

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3. Fearing a recession, the market continues to punish consumer shares. Retailers may face some inventory overhang and will be forced to offer discounts. Margins will tighten. We are basically returning to the pre-COVID regime.
 

 

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4. The S&P 500 divergence from VIX widened further last week amid limited demand for hedging.
 

 
5. The valuation adjustment in the current selloff has been impressive.
 
Source: Truist Advisory Services  
 
The Nasdaq Composite forward P/E ratio is nearing the pre-2020 range, but there is plenty of room to move lower.
 

 
Below are the forward P/E ratios for the Nasdaq 100 and the S&P 500.
 
Source: @mikamsika, @RyanVlastelica, @markets   Read full article  
 
Source: @FactSet   Read full article  

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6. More earnings downgrades ahead?
 

 
The Philly Fed’s manufacturing report points to substantial downside risks for corporate earnings.
 
Source: @MikaelSarwe  

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7. The Nasdaq 100 breadth is near the post-2009 lows.
 
Source: Bloomberg   Read full article  
 
8. It’s been a challenging period for post-IPO stocks.
 

 
9. The pullback in global liquidity doesn’t bode well for equity markets.
 
Source: Simon White, Bloomberg Markets Live Blog  
 
10. Correlations have been elevated (2 charts).
 
Source: Citi Private Bank  
 
Source: Deutsche Bank Research  

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11. Financials continue to see outflows (2 charts)
 

 
Source: Deutsche Bank Research  

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12. The healthcare sector is trading at a discount relative to the S&P 500 …
 
Source: Evercore ISI Research  
 
…and is holding long-term relative support.
 
Source: Evercore ISI Research  
 
Corporate insiders in healthcare have been busy buying shares.
 
Source: SentimenTrader  

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13. Analysts expect profit margins to keep growing. Too much optimism?
 
Source: Goldman Sachs  
 
14. Next, we have some additional performance data.
 
Here is last week’s factor performance.
 

 
And this chart shows the year-to-date performance.
 
Source: MarketDesk Research  
 
High-dividend stocks continue to outperform.
 

 
By the way, growth ETFs keep getting capital inflows.
 

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Clean energy stocks surged last week.
 

 

 
All large US tech stocks were down last week.
 


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Credit

1. Credit spreads kept widening last week.
 

 
2. Leveraged loans continue to see outflows.
 

 
Leveraged loans and BDCs underperformed last week.
 

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3. We haven’t had too many large retail bankruptcies this year (so far).
 
Source: S&P Global Market Intelligence  
 
4. In the US, the equity earnings-credit yield gap is the widest since 2010.
 
Source: TS Lombard  
 
In the Euro Area, however, credit yields are not as appealing as equity earnings yields.
 
Source: TS Lombard  


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Rates

1. Treasury market-implied vol has been rolling over as yields stabilized.
 

 

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2. China is buying US Treasuries (some of the purchases are through Belgium).
 
Source: @jnordvig  
 
3. Cyclical indicators point to lower yields.
 
Source: BCA Research  
 
4. Sentiment on bonds has been terrible.
 
Source: BCA Research  
 
5. Total bond flows have been negative.
 
Source: @EricBalchunas  
 
But capital continues to flow into Treasuries.
 
Source: Deutsche Bank Research  
 

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6. SOFR derivatives volume keeps improving (SOFR is the replacement for USD LIBOR).
 
Source: @CMEGroup  
 
7. Market-based longer-run fed funds expectations are close to the FOMC’s projections. Some would view Fed hikes above these levels as moving monetary policy into “restrictive” territory.
 


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Commodities

1. Sentiment on silver has been terrible. A buying opportunity?
 
Source: Sentix; @Callum_Thomas  
 
Precious metals ETF flows have turned positive.
 

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2. Speculative accounts are betting against copper.
 

 
3. Major diversified mining companies have reduced debt and increased cash flow (2 charts).
 
Source: Fitch Solutions Macro Research  
 
Source: Fitch Solutions Macro Research  

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4. Agricultural commodity ETFs continue to see inflows.
 

 
5. Lumber tumbled last week amid signs of weakness in the US housing market.
 

 

 
Source: Markets Insider   Read full article  


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Energy

1. European natural gas prices declined sharply last week.
 

 
2. This chart shows China’s oil reserves.
 
Source: Scotiabank Economics  
 
3. Next, we have some data on US coal exports.
 
Source: S&P Global Market Intelligence  


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Cryptocurrency

1. The top decentralized finance (DeFi) tokens have underperformed bitcoin over the past month, although some have stabilized last week.
 
Source: CoinDesk   Read full article  
 
2. China’s bitcoin miners are back online despite the nation’s ban last year.
 
Source: CoinDesk   Read full article  
 
3. The bitcoin hashprice, which represents the expected value of mining, is trending lower. That’s because of the lower price of BTC, more miners coming online, and an increase in network difficulty.
 
Source: CoinDesk   Read full article  
 
3. Bitcoin’s short-term realized volatility has declined over the past week.
 
Source: @GenesisVol  
 
4. Bitcoin’s put/call ratio is starting to tick lower.
 
Source: @CoinbaseInsto  


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Emerging Markets

1. The Turkish lira is holding near 16.0 to the dollar.
 
Source: barchart.com  
 
F/X reserves tumbled in recent weeks, …
 
Source: Bloomberg   Read full article  
 
… as foreigners dump Turkish stocks.
 

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2. USD/RUB is testing support at 60.0 as the ruble continues to strengthen.
 
Source: barchart.com  
 
Separately, Russia’s economy has been underperforming for decades.
 
Source: World Economics  

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3. LatAm currencies and equity ETFs outperformed last week.
 

 

 

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4. Many EM equity markets are undervalued vs. DM.
 
Source: TS Lombard  
 
5. Next, we have Morgan Stanley’s projections for policy rates in select economies.
 
Source: Morgan Stanley Research  
 
6. Remittances have been overtaking foreign direct investment, official development assistance, and portfolio flows.
 
Source: KNOMAD   Read full article  


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China

1. The renminbi is rebounding.
 

 
2. Hong Kong listings have sharply underperformed mainland shares.
 
Source: Numera Analytics  
 
3. Lockdowns have stalled the recovery in property sales (2 charts).
 
Source: Gavekal Research  
 
Source: Gavekal Research  
 
Here is why the PBoC cut the mortgage rate.
 
Source: BCA Research  

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4. Are capital outflows about to end?
 
Source: @RobinBrooksIIF  
 
5. China could be experiencing a recession, although the official data won’t show it.
 
Source: Pantheon Macroeconomics  


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Asia – Pacific

1. Taiwan’s April export orders surprised to the downside.
 

 
2. South Korea’s exports surged in May.
 


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The Eurozone

1. Italian and Spanish bond spreads have been widening.
 

 
2. Germany’s producer prices are up 33.5% from a year ago.
 

 
Eurozone’s inflation will remain elevated for some time.
 
Source: Pantheon Macroeconomics  

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3. Euro-area consumer confidence ticked higher this month.
 

 
4. Euro-area GDP growth forecasts have been revised lower.
 
Source: @bpolitics   Read full article  
 
5. Normally, a weaker euro could improve the current account. The problem is that it also makes energy more expensive for Europe.
 
Source: Pantheon Macroeconomics  


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The United Kingdom

1. The housing market remains robust.
 

 
But slumping consumer sentiment will be a headwind for housing going forward.
 
Source: Pantheon Macroeconomics  

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2. Retail sales were stronger than expected last month.
 

 
3. Wage indicators remain elevated.
 
Source: @IHSMarkitPMI  


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The United States

1. Recession fears have reached a feverish pitch, as financial conditions tighten.
 

 
Here is Morgan Stanley’s recession model.
 
Source: Morgan Stanley Research  
 
Companies are increasingly mentioning recession on earnings calls.
 
Source: Goldman Sachs  
 
Retailers are facing an inventory overhang, …
 
Source: @WSJ   Read full article  
 
Source: BCA Research  
 
… as the wealth effect becomes a headwind for consumption.
 
Source: Bain & Company¬†  
 
Heavy truck and auto sales have been soft.
 
Source: Simon White, Bloomberg Markets Live Blog  
 
The NY and Philly Fed manufacturing reports point to a contraction in the nation’s manufacturing sector.
 
Source: Yardeni Research  
 
But for now, credit indicators are not signaling a recession.
 
Household credit:
 
Source: Pantheon Macroeconomics  
 
Corporate credit:
 
Source: Longview Economics  
 
Money market stress:
 

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2. Other high-frequency data also suggest a recession is not imminent.
 
Evercore ISI business surveys:
 
Source: Evercore ISI Research  
 
Search for logistics topics:
 
Source: Google Trends  

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3. Americans’ comfort level with various activities keeps rising.
 
Source: Evercore ISI Research  
 
4. The market is increasingly discounting the possibility of a 75 bps rate hike next month.
 

 
Market-based longer-term inflation expectations are off the highs.
 


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Global Developments

1. What percentage of the G10 government bond debt is owned by central banks?
 
Source: Capital Economics  
 
2. Globalization has peaked.
 
Source: Goldman Sachs  
 
3. Here is why many countries are concerned about the US dollar rally (2 charts).
 
Source: Numera Analytics  
 
Source: BCA Research  

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4. Finally, we have some market performance data from last week.
 
The trade-weighted currency indices:
 

 
DM sovereign yields:
 


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Food for Thought

1. Projected inflation rates for 2022:
 
Source: Statista  
 
2. US sports equipment vs. gym membership price changes since Jan 2018:
 
Source: BCA Research  
 
3. Opinion of Russia in select countries:
 
Source: Morning Consult   Read full article  
 
4. Vaccine effectiveness against omicron over time:
 
Source: Longview Economics  
 
5. High-school students feeling persistently sad or hopeless:
 
Source: The Atlantic   Read full article  
 
6. Support for legality of abortion by state:
 
Source: PRRI   Read full article  
 
7. Teen employment in the US:
 
Source: @WSJ   Read full article  
 
8. Creating the perfect story:
 
Source: Statista  

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