WEEKLY: Risk assets head to the moon!
Updated: Jan 30
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Week ended Jan 27th, 2023
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This was another positive week across nearly all global risk assets, even as macroeconomic and corporate news was mixed. Although mixed, the news was sufficiently interpreted as “good enough” to spur the ongoing rally in stocks. Friday was a particularly strong finish for US stocks, with the S&P 500 up 2.5% for the week, setting the tone for the week ahead which will feature monetary policy decisions by the Fed, the ECB and the Bank of England, along with a slew of S&P 500 corporate earnings.
As was particularly the case during the pandemic “free money” period, it feels like we are in an environment where the more stocks increase, the more momentum investors pile in. To be fair to hedge funds and those retail investors that suffer from FOMO, it is difficult to imagine a good full-year 2023 if you have not been involved in the strong rally in equities that has occurred so far this month. I understand this, but does it make sense to you that TSLA (earnings) and NVDA (no earnings) are up 33% and 14%, respectively, just this week? Or that Bitcoin is up nearly 40% YtD?
I shared my thoughts and concerns about this flying 2023 start in an article I posted in EMC yesterday that you can find here: “Economic outlook vs stock prices”. To me, it is the perfect environment to be caught wrong-footed, which could be caused by a few things, two of which might be:
The Fed surprises investors next week with a 50bps increase in the Fed Funds rate rather than the “priced in” 25bps, and / or it gets the Fed talking heads back on the circuit to stress the Fed’s ongoing hawkishness, lest investors feel that inflation is under control.
One or more of the “FAMAG foursome” reporting next week – AAPL, AMZN, META and GOOG – disappoint. In addition, there are a slew of other companies across technology, pharma, automotive, retail/food, etc reporting next week, so any disappointment or series of disappointments could dent sentiment.
I doubt the Fed goes more than +25bps, and investors have already shown this round of earnings that they hear what they want to hear and ignore the rest. Therefore, I’m not exactly sure what the catalyst might be that will stop this crazy run. This rally is starting to feel increasingly fragile to this old-timer because it is less and less underpinned by economic reality and corporate earnings data.
MARKETS THIS WEEK
Chinese equity markets were closed this week for Chinese New Year. All other stock markets were open, and equities had a good week in nearly all markets except the UK. Bond yields drifted higher this week by a few basis points. The primary corporate bond market is booming, reflecting a moderation in underlying UST yields over the last few months, and the not-atypical front-end loading of corporate financing needs by companies that want to get their 2023 funding plans in place whilst conditions are nearly perfect. And perfect they are, with UST yields relatively benign whilst investment grade and high yield credit spreads are tighter by 15bps (IG) and 55bps (HY), respectively, YtD. In fact, corporate credit spreads have shown similar resiliency to the stock market so far this year, signalling little fear of a protracted recession. Suddenly, the 60/40 asset mix that looked so bad in 2022 as bonds and stocks were positively correlated, is looking fairly good in 2023. Both stocks and bonds have started the year on the right foot.
Below is a summary table of markets for this week. (Full tables further below, here.)
The US Dollar was slightly weaker this week, bringing its loss to 1.5% YtD and nearly 8% in the last three months. Gold has continued to react favourably to the weaker USD, up 6.0% YtD, but was about flat on the week. Oil moved sideways this week, with the price of WTI crude remaining largely range-bound in the $79/bbl to $81/bbl context over the last two weeks. Bitcoin has defied gravity and all sorts of broader crypto infrastructure concerns to increase a whopping 39% YtD, not a bad recovery story for those that play cryptos.
WHAT’S COMING THAT MATTERS
Eurozone: Mon consumer confidence, Tues Jan unemployment and 4Q22 GDP, Weds Jan CPI (ahead of ECB policy decision on Thurs)
US: Tues consumer confidence and home price data, Weds ISM manufacturing data (and FOMC policy decision), Fri Jan unemployment and ISM services data
Japan: Mon retail sales, unemployment and manufacturing data
S&P 500 earnings: 107 additional S&P 500 companies will report earnings this week, including:
Tues: AMD, Caterpillar, McDonalds, Exxon Mobile, Pfizer and GM
Weds: Meta Platforms (Facebook), Met, T-Mobile and Waste Management
Thurs: Amazon, Apple, Google, Bristol-Myers, Elli Lily, Estee Lauder, Merck, Ford, Qualcomm, Starbucks, Alibaba, Clorox, Harley Davidson and Hershey’s
US debt ceiling: Snore…. What can be said about this ridiculous situation?
Upcoming central bank monetary policy meetings:
Federal Reserve – Ja 31st/Feb 1st [THIS WEEK, expect +25bps] and Mar 21st-22nd
Bank of England – Feb 2nd [THIS WEEK, expect +50bps] and Mar 23rd
ECB – Feb 2nd [THIS WEEK, expect +50bps] and Mar 23rd
Bank of Japan –Mar 9th-10th and Apr 27th-28th[bullets]
Corporate bonds (credit)
Safe haven and other assets