Week ended July 14, 2023: Investors party!
Updated: Jul 16
This was a spectacular week for investors across most asset classes. After US stocks started the week with solid gains on Monday and Tuesday, more proverbial “fuel to the fire” was added by the favourable June CPI report released Wednesday morning (here) and strong big bank earnings released on Friday morning. The rally this week suggests that the poor performance of stocks the week before, which was the start of the second half of the year, might have been an aberration rather than the start of a new trend. Let’s hope so, although it will depend on a combination of 2Q2023 earnings as they continue to be released, and economic data, which will need to thread the needle as far as balancing dis-inflation and a slowing economy (but not a recession).
Speaking of earnings, better-than-expected top- and bottom-line results from JP Morgan Chase, Wells Fargo and Citibank on Friday before the opening bell added a dose of adrenaline to risk assets, suggesting that the much-anticipated US recession is still not upon us. Investors will be carefully watching the earnings of the other three large US banks this coming week, along with earnings from corporates in the coming weeks, to ensure that the so-called “soft landing” scenario remains the most likely outcome.
The ”feel-good” associated with the benign CPI read mid-week also spread into bond markets as yields dropped sharply across the curve this week. With all of this favourable news, I suppose it was only natural that something had to take it on the chin, and this turned out to be the US Dollar. The classic safe-haven currency sold off as investors perceive inflation to be slowing Stateside, improving the likelihood that the Fed will stop its monetary policy tightening sooner than expected. Investors exited the greenback, driving it to its lowest level in 15 months. The weaker Dollar had knock-on repercussions into collateral asset classes like emerging markets equities and commodities, with the former rallying hard this week. A weaker US Dollar also improves the competitiveness of US companies that operate abroad, favourable for US stocks. In fact, I’m starting to wonder if things could get any better. Could we gap up from here? Or will the slowing US economy start to weigh on stocks and other risk assets? At the moment, any negative vibes are overshadowed by inflation being brought ever-so-slowly under control and expectations that we will have another better-than-expected round of (2Q23) earnings.
MARKETS THIS WEEK
All of the international indices I track – except the Nikkei 225 (flat) – ended the week higher. The Nikkei 225 has been on a tear this year, so perhaps it is dawning on investors that – sooner or later – the Bank of Japan might tighten monetary policy just as other G7 banks end their rate-hike cycles. This sentiment weighted on the Yen (stronger WoW) and Japanese equities (flat, albeit up 24.1% YtD). Stateside, the Russell 2000 was the best performer on the week, suggesting that the rally in stocks in broadening to include smaller companies and out-of-favour sectors (many value-oriented). US Treasuries also recorded strong gains this week following the benign June CPI report. Yields were sharply lower across the board, with the yield on the 10-year UST closing back below 4%, down 23bps WoW. Another indicator of improving risk-on sentiment could be found in the corporate bond market. BBB-yields were lower by 34bps WoW (through Thursday close, 5.67%), and non-investment grade bond yields were 53bps tighter (down to 8.08%). Even as UST yields were falling, corporate credit spreads – normally “sticky” in the other direction – also actually decreased. High yield spreads dropped below 400bps for the first time since the March “mini-bank” crisis. Lastly, both WTI crude oil and gold rallied this week as the US Dollar weakened.
If you would like to see details by asset class / market type, go to “The Tables” section below.
WHAT’S AHEAD THAT MATTERS?
Earnings quarter ended O/A June 30, 2023 (2Q for most companies):
Banks continue with BOA and MS on July 18, and GS on July 19
“Magnificent seven”: AAPL, July 26; MSFT, July 27; GOOG (Alphabet), July 25; AMZN, July 25; TSLA, July 24; META (Facebook), July 27; and NVDA, Aug 23
Central bank meetings:
Federal Reserve (FOMC): July 25-26 (+25bps expected), Sept 19-20 (with updated projections)
ECB: July 27 (+25bps expected), Sept 14
Bank of England: Aug 3 (+25bps expected) and Sept 21
Bank of Japan: July 27-28 (you can’t possibly ask!) and Sept 21-22
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Corporate bonds (credit)
Safe haven and other assets