Weekly market insights

Weekly market insights

Institutional Opinions

  1. U.S. equities: The positive growth and inflation surprises, along with the broadening rally and strong performance of small-caps and value shares, suggest that the U.S. stock market may continue to perform well in the near term. The technology-heavy Nasdaq Composite's strong performance indicates that the technology sector might continue to outperform.
  2. Apple's market capitalization: With Apple's market capitalization surpassing that of five sectors in the S&P 500, it indicates the company's strong performance and market dominance. Apple's valuation reaching above USD 3 trillion suggests that it could continue to be a major player in the market and potentially influence the overall performance of the technology sector.
  3. U.S. economy: The positive economic indicators such as rising private sector incomes, a sharp drop in jobless claims, improved consumer sentiment, and strong durable goods orders and new home sales indicate a favorable macro backdrop for the U.S. economy. This suggests that the U.S. economy may continue to experience growth and recovery in the coming months
  4. Treasury market and municipal bonds: The increase in Treasury yields due to positive economic data suggests that bond prices might face downward pressure in the near term. However, despite the unfavorable ruling in Puerto Rico's bankruptcy case, municipal bonds outperformed Treasuries later in the week, indicating potential resilience in the municipal bond market.
  5. European equities: The positive performance of major European stock indexes and hopes for additional measures to boost consumption in China suggest a positive outlook for European equities. Lower-than-expected inflation data may also indicate that interest rates are near their peak, which could support European stock markets.
  6. Eurozone inflation and ECB: The slowdown in eurozone inflation and the ECB's indication of more interest rate hikes suggest that the central bank is taking measures to combat high inflation. However, the decision on further rate hikes will depend on incoming economic data. The yields on European government bonds remained above the ECB's 2% target, indicating ongoing concerns about inflation.
  7. Bank of England (BoE): BoE Governor Andrew Bailey's statement about interest rates likely staying higher for longer than expected suggests a potentially more sustained period of rate increases in the UK. The BoE's decisions will be driven by evidence and factors such as peak interest rates and sustained levels beyond that.
  8. Japan: Japanese equities have performed well, although yen weakness has moderated returns in U.S. dollar terms. The Japanese authorities' statement about considering all options to cope with excess volatility in the foreign exchange markets suggests a potential intervention if the yen continues to weaken. Inflation accelerating into 2024 could lead to a policy shift by the Bank of Japan.
  9. China: Mixed economic indicators in China, including a contraction in manufacturing activity and slower nonmanufacturing growth, suggest some challenges in the Chinese economy. However, Premier Li Qiang's commitment to strengthening domestic demand and implementing measures to support growth indicates the government's efforts to bolster the economy.
  10. Brazil and Turkey: The gradual easing of macroprudential regulations in Turkey and the potential for improved price discovery and equilibrium in the FX and local interest rate markets suggest a shift towards a more sustainable policy stance. In Brazil, the central bank's dovish changes and the possibility of rate cuts indicate a cautious approach to the country's inflation and economic conditions.
  11. Market Fluctuations: data suggests that investors should anticipate greater market fluctuations in the second half of the year. While the first half of 2023 saw relatively calm markets, there is a possibility of increased volatility in the coming months.
  12. Technology and Growth Investments: Technology and growth investments, which rebounded strongly in the first half of the year, may continue to perform well. The outperformance of tech-heavy indexes like the Nasdaq and the concentration of gains in mega-cap tech companies indicate a strong trend in the technology sector.
  13. Potential Vulnerability of Mega-cap Tech: Although mega-cap tech companies have been driving the market's gains, the narrow breadth of these gains suggests that the market could be more vulnerable to a short-term pullback if these companies stumble. Investors should keep an eye on the performance of mega-cap tech stocks.
  14. Interest Rates: Longer-term interest rates (10-year) have remained flat so far in the year, while shorter-term rates have been slightly more buoyant. The data suggests that the Fed may end its rate hikes in the coming months. However, a more meaningful pullback in yields would require further evidence that inflation is trending back toward the Fed's target.
  15. Economic Growth: The economy showed resilience in the first half of the year, driven by strength in household services, discretionary spending, and a robust labor market. However, the data predicts that both employment and spending growth will soften in the second half, leading to weaker GDP performance in the upcoming quarters.
  16. Small-cap Equities: Small-cap equities have leveled off relative to large-caps, indicating emerging optimism in the outlook for domestic economic growth. However, there hasn't been a decisive upturn in relative performance from small-caps that would signal a clear economic bottoming and new emerging expansion.
  17. Historical Trends: The data mentions historical trends indicating that strong first halves are often followed by further market gains in the second half. However, the data cautions against assuming a repeat of first-half gains and suggests that economic weakness and inflation concerns could pose challenges in the coming months.
  18. Probability of a Near-Term Recession: The negative reading on the Conference Board Leading Economic Index (LEI) for 14 consecutive months, along with the inverted yield curve and challenges in credit conditions, suggests a heightened risk of a recession in the near term. This indicates that economic activity may soften in the coming months.
  19. Impact on Financial Markets: The continued decline in the LEI index and the divergence between the economy and financial markets indicate a disconnect between economic health and market performance. Investors may need to carefully assess the potential implications of this disconnect on their investment strategies.
  20. Negative Contributors to the LEI: Consumer expectations for business conditions and the yield curve spread are identified as the largest negative contributors to the LEI. These factors suggest increased risk to the economy and may further indicate a potential slowdown.
  21. Positive Contributor: Building permits, driven by a record low supply of existing homes, provided a positive contribution to the LEI. However, the sustainability of this uptick in the housing market may be questioned due to challenges surrounding housing affordability.
  22. Policy Risks: With the Federal Reserve signaling two more rate hikes before the end of the year, the risk of a policy error triggering a recession is looming. Investors should remain cautious and focus on quality assets across both equities and fixed income to mitigate potential risks.
  23. Market Message vs. Economic Message: There is a gap between the market message, which suggests a "soft landing" engineered by the Fed, and the economic message, which indicates potential recessionary signals. This divergence leaves many questioning whether a recession is imminent.
  24. Positive Market Trend: The S&P 500 index has been in a firm uptrend since last October, with broadening participation observed recently. This positive market trend suggests that investors are optimistic and the market often moves ahead of the economy and fundamentals.
  25. Fed Tightening and Economic Weakness: The Federal Reserve remains in a tightening cycle to combat elevated inflation, and rate hikes typically have a lagging effect on the economy. Leading economic indicators and the yield curve are at levels historically consistent with a recession, but unique factors from the Covid era have delayed the timeline of economic weakness. Despite this, a mild recession is still expected to occur later in the year.
  26. Economic Surveys and Indicators: "Soft" economic surveys and indicators continue to point toward weakness ahead, such as the contraction in the Leading Economic Indicators index and the differential in Expectations vs. Present Situation in the Consumer Confidence survey. These indicators suggest a potential recession, even though the timing has been pushed out.
  27. Global Economic Conditions: Global PMIs have held up better than expected, supported by factors such as a mild winter, supply chain normalization, and consumers working off excess demand post-Covid. However, Manufacturing PMIs weakened in June, and the lagged effects of central bank tightening are expected to remain a drag on economic surveys. The services sector may also be rolling over and following manufacturing into contraction.
  28. Q2 Earnings Season: Q2 earnings season and pre-announcements are about to begin, and the bar for positive surprises is higher this time around. While Q1 earnings came out well above expectations, there are doubts that Q2 will provide the same upside surprise due to the higher expectations.
  29. S&P 500 Technical Analysis: The S&P 500 is undergoing a normal consolidation after breaking above multiple resistance levels. Potential support levels to watch include the 20-day moving average (DMA), 50-DMA, and 200-DMA. The 50-DMA around 4200 appears to be a strong support area.
  30. Broadening Market Participation: The narrow market leadership, particularly in the Technology sector, has been evident, but signs of improvement and broadening participation are starting to emerge beneath the surface. The S&P 500 equal-weight index has held above moving averages, and there are attempts to turn higher in small-cap relative strength. Monitoring these indicators will be important to gauge the health of the market.
  31. U.S. Dollar as the World's Reserve Currency: The U.S. dollar has been considered the world's reserve currency since World War II, and it continues to hold that status. It makes up nearly 60% of all foreign central bank reserves, which is more than double that of the euro. Despite the potential diversification of central banks' holdings, the U.S. dollar remains the currency of choice in the global economy.
  32. Perception of the U.S. Dollar as a Safe Haven: The U.S. dollar is perceived as a "safe haven" currency in times of global turmoil. The stability of the U.S. government and the strength of the rule of law contribute to this perception. As a result, the U.S. has often seen investment inflows from abroad during periods of global uncertainty.
  33. Size and Liquidity of the U.S. Treasury Market: The U.S. Treasury market is the largest sovereign market on the planet, estimated to be $51 trillion. This size and liquidity of the U.S. Treasury market contribute to the dominance of the U.S. dollar. In comparison, China's sovereign debt market, the second largest, is significantly smaller at $21 trillion.
  34. Challenges to the Dollar's Dominance: While there have been discussions about potential challenges to the dollar's dominance, such as agreements to price some oil transactions in Chinese yuan and the broader acceptance of cryptocurrencies, these factors are not expected to knock the dollar off its perch as the world's reserve currency. The widespread acceptance, liquidity, and safe haven status of the U.S. dollar make it difficult for another currency to replace it.
  35. Comfort for U.S. Dollar Investors: Investors in the U.S. dollar can take comfort in the fact that it is still the world's reserve currency. The dollar's dominant position in global finance and its perception as a safe haven and store of value provide support for its continued strength.
  36. Brightening Outlook for Japanese Stocks: The outlook for Japanese stocks is improving compared to developed peers. This is attributed to factors such as fewer supply constraints, supportive monetary policy, and corporate reforms. The corporate reforms, particularly a more shareholder-friendly approach, are expected to have a positive impact on Japanese stocks.
  37. Central Banks Compelled to Hold Policy Tight: Short-term bond yields in developed markets rose, and central banks are expected to maintain tight monetary policy due to persistent inflation. This suggests a tighter policy era ahead, reinforcing greater macro and market volatility.
  38. Continued Inflation in the US and Euro Area: The data suggests that inflation remains persistent in the US and euro area. This indicates that inflationary pressures are still present and may continue to impact these regions.
  39. Reviving Foreign Investor Interest in Japanese Stocks: Foreign investment in Japanese stocks has surged since April, reversing the lackluster interest of recent years. This renewed interest is driven by a more shareholder-friendly approach by Japanese companies and the expectation of a slow unwind of loose monetary policy. The potential for tax incentives in Japan starting in 2024 may also attract Japanese investors to shift from cash into investments.
  40. Weakness in Europe's Economy: Europe has entered a recession in the first quarter of the year, primarily due to the energy shock triggered by geopolitical events. The impact of higher energy prices has slowed economic activity and squeezed people's pockets. The European Central Bank (ECB) may halt its rate hikes if activity continues to deteriorate, but cutting rates may not be considered due to strong inflationary pressures.
  41. Recessionary Environment and Bond Market: The data suggests that central banks are engineering a recession to bring down inflation. In this environment, traditional strategies like "buying the dip" may not be applicable, and continuous reassessment of economic damage is necessary. Short-term government bonds are seen as more attractive for income and capital preservation, while long-term government bonds may not offer the same level of portfolio protection due to the negative correlation with stocks and the possibility of higher rates for longer.
  42. Living with Inflation: High inflation has sparked cost-of-living crises and put pressure on central banks to address it. The narrative around inflation is expected to change, with the understanding that inflation may persist above policy targets in the coming years. Factors such as aging populations, geopolitical fragmentation, and the transition to a lower-carbon world are seen as long-term constraints that will keep inflation elevated.
  43. Recession Delayed: The consensus among forecasters is that the anticipated recession, originally expected in 2023, has been pushed into early 2024 due to the surprise improvement in first-half economic data. This suggests that the economy will continue to show signs of growth and stability in the near term.
  44. Federal Reserve Rate Hikes: The delayed recession and persistent core inflation are expected to force the Federal Reserve (Fed) to raise interest rates more and for a longer period than previously anticipated. This implies that borrowing costs will likely increase, which could impact various sectors of the economy.
  45. Shift in Market Narrative: The market narrative has shifted due to the delayed U.S. economic recession, a technical eurozone recession, underwhelming recovery in China, and the Fed's revised expectations for inflation, unemployment, and interest rates. Investors are advised to adopt a more measured approach to asset allocation as the new summer narrative unfolds.
  46. Long-Term Returns of Asset Classes: Historical data suggests that the S&P 500 has outperformed other asset classes over the post-war era, with annualized total returns of 11.2%. Corporate credit, government bonds, cash, and inflation have posted lower average annual gains. This information highlights the potential long-term benefits of investing in equities.
  47. Potential Upside Market Returns: Despite the recent economic challenges, the acceleration of generative artificial intelligence and other innovation-related activities is expected to underpin a new cycle with the potential for upside market returns. This suggests that there may be opportunities for investors as new technologies and innovations drive economic growth.
  48. Longer Slowdown before Cyclical Upswing: The revised forecasts indicate that the slowdown in the economy will be more protracted before the next cyclical upswing. While growth is expected to be better than originally predicted in 2023, more of the slowdown has been pushed out into 2024. This implies that the economy may experience a longer period of slower growth before recovering.
  49. Inflation and Interest Rates: Stickier inflation than previously anticipated is expected to result in a more protracted slowdown and a higher terminal interest rate. The Fed's commitment to fighting inflation and the potential for a prolonged economic slowdown suggest that interest rates will remain elevated for a longer period.
  50. Global Growth Outlook: The global growth outlook remains muted, with the U.S. and Europe being the most vulnerable due to inflationary pressures. Excessive monetary and fiscal stimulus in these regions has created inflation problems, while countries like China and Japan have more room for fiscal and monetary expansion if needed.
  51. Fiscal Policy Challenges: The scope for fiscal policy stimulus in the U.S. is rapidly diminishing, despite a high unemployment rate. The deteriorating fiscal outlook and the reduced likelihood of the Fed buying government debt in a higher inflation economy have caused real interest rates to rise. These challenges may impact stock valuations and corporate profits.
  52. Potential Volatile High Inflation: If the Fed decides to abandon monetary discipline and monetize the growing deficit problem, there may be a period of volatile high inflation ahead. This highlights the importance of the Fed's approach to monetary policy and its impact on future economic conditions.
  53. Market returns: The near-term market returns are expected to be influenced by the U.S. economy and central bank policies. The performance of the market will depend on whether the U.S. economy enters a recession or continues to expand. The long-term outlook is still positive, but uncertainties exist, requiring patience from investors.
  54. Equity markets: Recessions are historically challenging periods for equity markets, but they do not dominate the investment landscape. The U.S. economy has been in recession for only 15% of the time since 1945. The current market rally may continue in the summer months, driven by the "fear of missing out" mentality. However, reliable leading indicators of a U.S. recession are worsening, suggesting that the current rally will eventually face challenges.
  55. Portfolio positioning: It is recommended to maintain market-weight equity exposure in the U.S., but with a slight tilt toward defensive sectors and dividend growers. In Canada, the energy complex, including Canadian oil majors, is favored. In Europe, opportunities are seen in leading semiconductor equipment manufacturers, electrical equipment providers for AI data centers, luxury stocks, and select European industrials tied to decarbonization, automation, and onshoring trends. Defensive, quality UK companies are preferred. In Asia Pacific, Japan remains the preferred developed market, and defensive and high-dividend-yield stocks in China are favored.
  56. Fixed income: The expected banner year for bonds in 2023 has not materialized yet, but steady gains are still expected as rate hike cycles near their end points. Inflation is expected to ease, and central banks are likely to take a cautious policy approach. Yields are expected to fall modestly in the back half of the year. In the U.S., bond returns are expected to be around the coupons paid for the year, providing income to bond investors.
  57. Economic outlook: United States: Consumer confidence has risen, and the outlook for labor markets and economic growth is positive. Inflation is expected to soften, and the Federal Reserve may implement one more 25 basis point rate hike in July. Interest rate expectations have changed, and the current outlook is different from three months ago when rate cuts were anticipated. Canada: Inflation is showing signs of easing, but further monetary policy tightening may still be considered due to resilient economic growth, solid consumption patterns, tight labor markets, and persistent above-target inflation. Mortgage costs have increased, putting pressure on consumers. Europe: Optimism on the eurozone economy is fading, and a more realistic assessment of the economic situation is emerging. Economic growth may be sluggish, but the European Central Bank (ECB) is still expected to hike interest rates to 4% from the current 3.5%. Opportunities exist in infrastructure build for Generative AI and other sectors. Asia Pacific: China's consumption-led recovery is slowing down, and additional government support may be necessary. U.S.-China economic talks are planned, and potential regulatory actions on U.S. investments in China are expected. The tightening of semiconductor export restrictions may impact Asia Tech stocks. Kakao Entertainment Corp. has secured significant financing for content expansion.
  58. Short-term equity pause: The data suggests that a short-term pullback has occurred in the equity markets. While a bounce has developed over the past two days, the indicators indicate that the market may need to move sideways or downwards before a timely entry point for investors. The next support levels to watch are 4195-4155 for the S&P and 13,150 followed by 12,437 for the Nasdaq.
  59. Sector rotation: The data emphasizes the importance of sector rotation in the technical story. The recommendation is to look at areas of the equity market that are less advanced than technology and growth stocks for new capital. The industrial sector, in particular, is highlighted as having a potential breakout above 912, which would be an important technical event. The S&P 500 Industrial sector index is expected to experience further sideways churn in the near term but potentially break out to new highs in Q3.
  60. Dow Transport and Dow Industrial Average breakouts: The data suggests that both the Dow Transportation Average and Dow Industrial Average charts are poised for upside breakouts. The Dow Transport Average has been rallying, indicating strength in the group and potentially signaling an uptrend confirmation if it moves above the prior bounce high at 15,888. The Dow Industrial Average, although lagging, remains in a position to strengthen, and a breakout above the 2023 highs near 34,712 is expected in Q3.
  61. Oil Service index turnaround: The S&P 500 Oil Service index is highlighted as an investment area that has experienced a pullback but shows signs of bottoming. Weekly momentum has turned up, indicating a potential shift in the index's performance. The key downside risk control level is near the recent lows at 310.


Past week:

  1. Economic growth in the U.S. is likely to cool and fall below trend, potentially reaching sub 1.0%. While a traditional recession with multiple quarters of negative growth may not occur, certain sectors may experience downturns while others stabilize and rebound.
  2. Inflation is expected to trend lower as economic growth cools. Forward-looking indicators for inflation, such as the ISM prices paid indexes, supply chain pressure metrics, and used car prices, are all showing downward trends. The Federal Reserve may find relief in cooling wage growth and easing services prices, allowing for some relief in core inflation.
  3. The Federal Reserve is likely to pause its interest-rate hiking cycle in the second half of 2023. Although the Fed has projected a peak fed funds rate of 5.6% with two more rate hikes, markets anticipate only one more hike in July before a pause. The Fed will likely remain highly data-dependent and could signal rate cuts by the end of the year or early next year if inflation continues to moderate.
  4. Opportunities are emerging in both equity and bond markets. While there may be some periods of volatility and potential economic slowdown, this presents opportunities for investors to position themselves ahead of a more sustainable recovery. Sectors such as small-cap stocks, cyclical sectors (e.g., industrials, materials, consumer discretionary), international equities, and AI and technology may show leadership in the equity market. In the bond market, there may be opportunities to complement short duration bonds and cash-like instruments with longer-duration bonds, particularly in the investment-grade space, as Treasury yields potentially peak in the weeks ahead.
  5. U.S. stock market: The U.S. stock market experienced a decline in a holiday-shortened trading week. This break in the winning streak, along with signs of potential future Federal Reserve rate hikes and a decrease in manufacturing output, may indicate a cautious sentiment among investors. The performance of growth stocks, value shares, large-caps, and small-caps can provide insights into market dynamics and investor preferences.
  6. European markets: European markets, including the STOXX Europe 600 Index, major stock indexes like Germany's DAX and France's CAC 40 Index, experienced declines. Concerns over potential recession in Britain and the eurozone, along with hawkish comments by the U.S. Federal Reserve Chair, contributed to the negative sentiment. Additionally, the Bank of England's decision to accelerate the pace of interest rate increases indicates a response to inflation concerns.
  7. Japan's stock market: Japan's stock markets retreated from their 33-year highs, with the Nikkei 225 Index and TOPIX Index experiencing declines. The hot core consumer inflation print in Japan and speculation about the Bank of Japan revising its inflation forecasts may have influenced market sentiment. The divergence between the monetary policy of the Bank of Japan and other major central banks can impact yields and currency exchange rates.
  8. Chinese stock market: Chinese stocks experienced a decline amid concerns about the country's economic recovery. The lack of stimulus measures, slowing export demand, a housing market slump, and weak business and consumer confidence contributed to these concerns. The tax break package for electric vehicle purchases may aim to stimulate demand and production in the EV sector.
  9. Turkey's central bank: The Turkish central bank raised its one-week repo auction rate by 650 basis points, though it was below market expectations. The central bank aims to establish a disinflation course and reach the inflation target. Further interest rate increases and potential fiscal policy changes may be expected.
  10. Chile's central bank: Chile's central bank kept its monetary policy rate unchanged but saw two board members voting for a rate cut. The central bank's forward guidance suggests a potential downward process in the short term if positive economic trends continue. Revisions in growth and inflation outlooks, as indicated in the monetary policy report, align with the dovish tilt of the central bank.
  11. Student loan payment resumption: With the pandemic student loan debt relief program ending on June 30 and payments resuming in late August, there is a risk that the resumption of student loan payments will detract from spending in discretionary areas such as clothing and entertainment. Younger Americans, who hold a majority of student loan debt, tend to have higher credit card debt and smaller accumulated savings, making them more likely to be affected by the resumption of payments. This could result in a moderate hit to the economy as consumer spending in these areas decreases.
  12. Impact of tightening measures: The Federal Reserve's hawkish messaging and the potential for further tightening in the coming months, along with the resumption of student loan payments, could add to the vulnerability of the economy. The timing of these events, coupled with falling inflation and economic uncertainties, may make it challenging for the economy to withstand the impact of monetary and credit tightening. The prediction suggests that even a modest consumer pullback could have a negative effect on the economy.
  13. Economic resilience: Despite the emerging cracks and risks, the data indicates that economic growth has been resilient so far. This resilience suggests that the economy may be able to weather tighter conditions for a longer period. However, it is important to monitor the potential cumulative impact of multiple factors such as student loan payment resumption, tightening measures, and other economic storm clouds that may pose challenges to this resilience.
  14. Near-term pullback in equity markets: The data suggests that a near-term pullback is likely in equity markets, including the S&P 500, Nasdaq, Dow Industrial Average, and Russell 2000. Technical analysis indicators, such as retracement levels and resistance bands, are being closely watched by analysts, and these indicators point to short-term pullbacks in the mentioned indices. This does not anticipate a major correction and considers the pullback as a necessary and healthy event for the markets.
  15. Weakness in growth and technology stocks: During the coming weeks, the weakness in equity markets is expected to be more pronounced in the advanced growth and technology stocks. These sectors, which have shown significant gains in recent times, are likely to experience a pullback. Investors should be prepared for this weakness in these areas of the market.
  16. Improvement in lagging sectors: The data suggests that areas of the equity market that have lagged in 2023, such as Industrials and Healthcare, are showing signs of improvement. While these sectors may also experience short-term pullbacks, they are considered more timely areas for diversifying portfolio exposure. This indicates a potential shift in market sentiment towards sectors that have previously underperformed.
  17. Long-term upside for industrial sector: The industrial sector is highlighted as an area of interest, showing recent strength and a technical profile that suggests a potential breakout from a multi-year trading range. While a short-term pullback is expected, the longer-term outlook for the industrial sector indicates further upside potential in 2023.
  18. For the S&P 500: The first support level is identified near the August highs and the 50% retracement level, which is a technical analysis tool that measures the magnitude of a previous decline. The specific range for this support level is between 4311 and 4325. It is worth noting that this level coincides with the 62% retracement level of the 2022 decline, indicating a significant potential support area. The next support level is identified between 4155 and 4195. This range also corresponds to a 50% retracement level of the 2022 decline.
  19. For the Nasdaq: The first support level is between 13,181 and 13,150. This level represents a 50% retracement of the 2022 bear market, suggesting a potential area where the decline could find support and reverse. The next support level is within the range of 12,427 to 12,270. This range aligns with the breakout that occurred in the second quarter (Q2) and also corresponds to a 38% retracement level. This indicates another significant support area.
  20. UK Politics: The Labour Party is expected to focus on "making Brexit work" and transforming Britain into a "clean energy superpower" by 2030. If Labour wins the next election, they will inherit a country with deep scars from Brexit and the Bank of England's monetary policy tightening. The economic challenges and higher interest rates could negatively impact consumer spending and the housing market, potentially improving Labour's electoral prospects.
  21. UK Equities: The recommendation for UK equities is to maintain an underweight position due to the subdued outlook for the domestic economy. However, opportunities exist in internationally focused equities, particularly those in defensive sectors such as Utilities, Health Care, and Consumer Staples. The valuation of the FTSE All-Share Index is considered attractive, and dividends from UK companies are generous.
  22. Euro Zone: The euro zone has entered a technical recession, with a contraction in regional GDP. Economic activity in service sectors is holding up, but manufacturing is experiencing a slump due to global destocking. While the outlook is muted, fiscal stimulus and low unemployment levels are expected to support the economy. However, European equities are suggested to be underweight due to historical underperformance during periods of global activity weakening.
  23. Investment Opportunities: Despite the challenges, there are opportunities for investors. The technology sector in Europe may present opportunities related to infrastructure build for generative AI. Leading semiconductor equipment manufacturers and select electrical equipment providers could benefit. Luxury stocks with strong growth, brand momentum, and reasonable valuations are also favored. European industrial stocks positioned for decarbonization, automation, and onshoring trends are seen as positive long-term prospects.
  24. Bank of Canada (BoC): The BoC has raised the overnight lending rate, and the focus is on the health of the consumer. While the economy has proven resilient, cracks are starting to form, with declining job openings and rising consumer delinquency rates. The increase in the domestic stability buffer aims to ensure sufficient capital for banks in times of financial stress. Canadian bank equity valuations appear inexpensive, but catalysts for significant valuation improvements are uncertain.
  25. Bank of England (BoE): The BoE has implemented a shock interest rate hike, signaling deep concern about inflation. The central bank is open to delivering more hikes, although multiple 50 basis points moves are not the base case. The peak policy rate could reach 5.50%-5.75%. However, a Bank Rate of around 6% could potentially lead to a recession. The increase in mortgage rates could negatively impact households and further squeeze finances.
  26. Consumer spending remains strong: The economic data indicates good levels of consumer spending, which suggests that consumers have money to spend and are likely to continue doing so. This can have a positive impact on the economy.
  27. Labor market remains tight: Despite a slight increase in the unemployment rate, the labor market is still considered tight. This means that employers may continue to face challenges in finding skilled workers, which could lead to rising wages.
  28. Service-oriented businesses are in high demand: As pandemic restrictions ease, service-oriented businesses like restaurants and air travel are experiencing high demand. This can lead to increased hiring and rising wages in these sectors.
  29. Manufacturing sector in mild recession: The data indicates that the manufacturing sector is currently in a mild recession, potentially due to a decrease in consumer demand for manufactured goods as people shift their spending toward services.
  30. Central banks are likely to maintain tight monetary policies: Major central banks, such as the Federal Reserve and the European Central Bank, are expected to keep policy rates higher for longer due to inflation. The focus on inflation may lead to further rate hikes in the near future.
  31. Developed markets may experience a mild recession: There are indications that a mild recession has already occurred in the United States and the euro area. The impact of rate hikes on economic activity will be assessed through PMI data. The tightening bias of central banks and potential trade-offs between growth and inflation suggest a challenging economic environment.
  32. Emerging markets may see policy loosening: In contrast to developed markets, emerging market central banks have already started hiking rates and may be closer to the end of their tightening cycles. Falling inflation in emerging economies, such as China, may create room for central banks to ease monetary policy. This makes emerging market debt, particularly local currency debt in countries like Brazil and Mexico, attractive.
  33. Sticky inflation will persist: High inflation, driven by wage pressures and supply constraints, is expected to persist into the next year. Central banks will likely be constrained in their ability to cut rates due to the need to combat inflation. Short-term government bonds are favored as interest rates are expected to stay higher for longer.
  34. Market volatility and reevaluation of economic damage: The heightened macro and market volatility requires continuous assessment of market pricing and the potential economic damage caused by central bank actions. Recession risks and the changing correlation between stocks and bonds suggest a need for a reassessment of investment strategies.
  35. Short-term government bonds preferred over long-term government bonds: Short-term government bonds are considered more attractive for income and capital preservation in the current environment of tighter credit and financial conditions. Long-term government bonds may not provide the same recession protection as in the past, as central banks may not respond with rapid rate cuts.
  36. Inflation-linked bonds are favored: Given the expectation of persistently higher inflation, inflation-linked bonds are overweighted on both tactical and strategic horizons. This investment approach aims to benefit from the impact of inflation on fixed income investments.
  37. "Soft landing" scenario: The data suggests that there is confidence in a "soft landing" scenario for the U.S. economy, in which the Federal Reserve manages to bring both growth and inflation back to moderate, sustainable levels without causing a recession.
  38. Moderating labor demand: Leading indicators of labor demand, such as job openings and temporary help services employment, suggest a cooling of labor demand ahead. This indicates a potential decline in employment growth and a possible increase in the unemployment rate.
  39. Interest rate cycles: Interest rates tend to follow predictable patterns within the business cycle. Currently, the data suggests that rates may have peaked, and there is a possibility of rate cuts in the future as the economy moves into a recession.
  40. Duration positioning: Considering the current business cycle dynamics, there may be opportunities to extend duration in portfolios, particularly towards the end of the expansion when rates may have peaked. However, there are risks associated with increasing duration, such as high inflation and heavy Treasury bill issuance.
  41. Rebalancing towards defensive investments: Economic indicators suggest that a rebalancing towards more defensive investments may be prudent as markets bid up risk assets on hopes of a "Goldilocks" economy. This indicates a shift in investment preferences towards safer options in anticipation of potential market downturns.
  42. Impact of heavy Treasury bill issuance: The heavy issuance of Treasury bills may have differing effects on the rate environment. It may put upward pressure on rates, particularly on the short end, but the overall impact on longer-term interest rates may be limited due to available funds and liquidity.
  43. Recession outlook: Based on historical patterns, an inversion of the yield curve (short rates higher than long rates) often precedes a recession. The data suggests that the Fed is nearing the end of its rate hike cycle, and a recession is likely to occur in the first half of 2024.
  44. Market Volatility: The market is expected to experience some volatility in the near term due to stretched positioning and potential risks from the upcoming earnings season and macro concerns.
  45. Earnings Season: The upcoming earnings season for 2Q'23 is expected to show a YoY decline of 5.3% for the S&P 500. Although the pace of deceleration has slowed, there have been downward revisions in aggregate earnings. This could pose a near-term risk for the markets.
  46. Valuation and Investment Options: The relative valuation of equities compared to other investment options, such as cash and fixed income, is at extremely low levels. This suggests that the upside potential for equities in the near to mid-term may be limited.
  47. Fear Indicators: Traditional fear indicators, such as the VIX and Put/Call ratio, are currently showing high levels of complacency in the market. However, if leading economic indicators weaken further or fear indicators pick up, it could cause increased volatility for equities.
  48. U.S. Dollar and Emerging Markets: The next move for the U.S. Dollar could be pivotal for Emerging Markets. A sustained move lower in the Dollar could be positive for Emerging Markets, while a breakout to the upside could pose a headwind. The U.S. Dollar is currently forming a basing pattern and is oversold.
  49. Technology Sector: The Technology sector's price performance remains strong, nearing a breakout of all-time highs. However, the sector is deeply overbought, and a move higher in the 10-year yield could lead to a P/E valuation correction. Other sectors may need to broaden out for sustained equity market gains.
  50. Health Care Sector: The Health Care sector has shown some broadening out and relative performance improvement. While relative EPS will need to firm for the sector to outperform, attractive valuation and recent broadening are positive factors to watch for the sector.

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