Equity MarketsAs we begin the first full week of the Trump administration here are a few market themes to consider.
1. The Dow seems to be stuck in a fairly tight range as investors wait for policy news. Volatility is likely to increase going forward.
2. US investor sentiment remains quite buoyant, closely following consumer confidence. The second chart below shows speculative accounts further raising their short-VIX exposure last week (an indication of elevated risk appetite).
Source: Yardeni Research
3. Institutional investors are becoming increasingly concerned about US policy tail risk – especially as it relates to international trade. particularly the possibility of a trade war with China.
Source: @ConnectedWealth, @sobata416
4. The dollar and interest rates are expected to be the biggest drivers of stock prices over the next six months.
Here are the most common topics referenced in the recent earnings calls.
Source: Credit Suisse
5. As discussed before, consensus earnings per share have risen considerably lately. These estimates are pricing in a material improvement in US economic growth, without which a stock market correction is sure to follow.
Source: Credit Suisse
6. The so-called “Trump trades” remain rather crowded. Here are some survey results from Merrill Lynch.
• This chart shows a dramatic sentiment shift toward small caps.
• Here are a couple of indicators of flows into Trump trades.
Source: BofAML, @NickatFP, @joshdigga
Source: Credit Suisse
7. Pharma and retail remain the two sectors with sharply widening underperformance.
Trump's talk about the US Government being the world's largest buyer of prescription medicine and
that absolutely no "buying in size" price discounts are very real and likely outcome.
8. With correlations in the equity markets hitting multi-year lows, stock picking will perhaps once again take center stage. As the second chart below shows, the active funds’ dramatic underperformance may have bottomed.
Source: BofAML, @NickatFP, @joshdigga
Source: @WhatILearnedTW, @cheapbeta, @Callum_Thomas
9. Separately, it seems that Qualcomm is getting hit from multiple directions as the South Korean government, the FTC, and now Apple – are all going after the firm for allegedly abusing its dominant position in mobile device chips.
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Credit1. Investors remain heavily underweight global bonds (we’ve discussed big short positions in Treasuries last week).
2. Leverage has been on the rise across corporate credit. Citi sees a reversal in this trend if rates and growth indeed rise.
Source: Citi, @NickatFP, @joshdigga
Source: Citi, @NickatFP, @joshdigga
3. The massive rally in High Yield over the past nine months is making middle market lending more attractive again (on a relative basis).
Source: @theleadleft, @Debtwire, @josephncohen; Read full article
4. Outside of France, European auto loan/lease securitization has finally taken off. Despite bureaucratic headwinds (such as those from the BIS), the ECB and the Bank of England have both encouraged this development to stimulate economic growth.
Source: Moody’s Investors Services
Source: Moody’s Investors Services
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Commodities1. In the energy markets, we continue to see “OPEC and friends” trying to talk up the market.
Source: CNBC; Read full article
At the same time, North American (both US and Canada) production is picking up momentum. Here is the latest rig count. As discussed before, the market may be surprised by the speed of these developments.
really a quite aggrssive expansion in Canadian Crude oil and Nat Gas Rig count
2. Speculative accounts, nonetheless, keep piling into the long-oil trade. It’s time for some caution.
3. In other commodity markets, coffee futures are staging a recovery.
4. Palladium hit the highest level since mid-2015 on strong global auto sales (the metal is used in catalytic converters).
3. India’s demonetization has been unprecedented.
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