US inflation slows down, US Bond yields are lower, Russell 2000 is up 6% on the week while US Tech mega caps corrected
WEEKLY TRENDS
MARKETS
Equities
Big rotation from US Tech mega caps to US Small Caps.
Better Outlooks for Swedish Addtech (+22% wow) Finnish Terveystalo (+11%) Norwegian Aker (+14%) and Kongsberg (+21% wow).
Worst Outlooks for Dassault Systemes (-4% wow), HubSpot -19% on takeover cancellation from Alphabet.
Analysts Upgrades for Ubisoft +14% wow (upgrade given by Jefferies).
M&A events for Carlsberg that is to buy Britvic ($3bn), Lilly to buy Morphic ($3bn), Grifold +9% and Hiscox +13% (both takeover bid targets).
IPO planned for Vivendi (Canal+) in London or Amsterdam (by year-end).
Rates
US Treasuries yields lowered by 10 to 15bps on the week (after US June CPI was released at 3% vs 3.1% expected and 3.3% prior in May).
95% chance to have a Fed rate cut in September (-65bps in 2024).
French vs German 10 year spread at 65bps (low of the 65-80bps range).
US
June PPI at 2.6% vs 2.3% expected and 2.4% prior in May.
EU
Moody’s warned on French debt outlook amid political gridlock.
China
Chinese regulator suspended securities relending (ie, short-selling ban).
40 Chinese banks vanished in June on NPL (Non Performing Loans).
Largest monthly trade surplus in 24yrs, near $100bn in June (jump in exports while imports declined unexpectedly).
Nota Bene
US Bond yield inversion (35bps) for the 2yr-10yr but dramatic steepening (5bps) for the 2yr-30yr (was still at 35bps mid-June).
Most recent Atlanta Fed estimate for US Q2 GDP is currently at 1.7% vs 4.2% in May and 2.2% in June.
CALENDAR
WHAT ANALYSTS SAY
Tikehau Capital, Newsletter June 2024 – Strategic focus US High Yield
Author: Erika Morris, Portfolio Manager
The U.S. high yield market posted a strong month in June returning +0.9%. A muted new issue market, declining default rates and a strengthening view of a soft landing fuelled the positive returns this month.
The Automotive sector (+7%) and Healthcare sector (+6%) outperformed this month while Cable and Telecom underperformed. While much attention was focused on EVs this month, the gain in the auto sector was largely from Carvana moving higher. Political rhetoric in the U.S. is heating up and will likely continue through the coming months in addition to ongoing political issues out of France and Germany.
New issue activity came in at only $18bn following five months of over $20bn in monthly volumes. June's default rates and distressed exchanges were also at very low levels with the LTM default rate dropping to 1.2% or 90bps lower since the start of the year.
The Tikehau Focus Fund returned +1.2% in June after lagging the broader high yield market last month. Several Media/Telecom names and one Broadcasting name moved up in the portfolio during the month despite Media/Telecom being one of the underperforming sectors in the broader high yield indices. The worst performing credit this month was one we reduced exposure to which was well timed as it had minimal impact on overall portfolio returns. One portfolio company that announced it was in discussions with a direct lender to potentially refinance the capital structure was actually upgraded by a rating agency this month. This is quite important as it supports our strategy in that we believe the underlying companies in the portfolio are better quality companies than the ratings suggest.
If direct lenders and other private debt/equity managers are willing to refinance some of the portfolio companies it should provide additional support and liquidity to this part of the high yield market. We have discussed our positive outlook on infrastructure related credits and, admittedly, we were perhaps early in that we have not seen the overall price improvements on infrastructure related exposure in the portfolio. Recently one name in the portfolio was awarded a railroad bridge construction contract which we believe may be the early signs that the much anticipated infrastructure spending money will be deployed after many years of watching and waiting. We look forward to more updates on that sector of the market.
World Gold Council, 9 July 2024 – June Gold ETF data, sustained inflows in June narrowed H1 losses
Author: WGC
Following the strongest month since May 2023, global gold ETFs have now seen inflows two months in a row; in June, notable European and Asian buying offset outflows from North America. Although June and May inflows helped limit global gold ETFs’ y-t-d losses to US$6.7bn (-120t), this remains the worst H1 since 2013 – both Europe and North America saw hefty outflows while Asia was the only region with inflows.
A stronger gold price and recent inflows pushed the total AUM to US$233bn, but collective holdings remain near their lowest since 2020
Trading volumes across different gold markets witnessed a mild decline in June; however, the H1 average remains well above its 2023 level as OTC and futures trading were exceptionally active.
WEEKLY TRENDS
- A slowing US inflation (CPI) benefitted the stock markets (new record highs), Gold, Bonds globally
- Huge rotation among US stocks (so far underperforming Russell 2000 ended the week at +6% while mega performing Magnificent 7 ended the week lower with Google and Amazon ending at -3%, Meta at -8%), possibly due to Hedge Funds unwinding some of their large positions (long Large capitalisations / short SMEs)
- JP Morgan and Citi reported a strong increase in Q2 earnings on Friday
MARKETS
Equities
Big rotation from US Tech mega caps to US Small Caps.
Better Outlooks for Swedish Addtech (+22% wow) Finnish Terveystalo (+11%) Norwegian Aker (+14%) and Kongsberg (+21% wow).
Worst Outlooks for Dassault Systemes (-4% wow), HubSpot -19% on takeover cancellation from Alphabet.
Analysts Upgrades for Ubisoft +14% wow (upgrade given by Jefferies).
M&A events for Carlsberg that is to buy Britvic ($3bn), Lilly to buy Morphic ($3bn), Grifold +9% and Hiscox +13% (both takeover bid targets).
IPO planned for Vivendi (Canal+) in London or Amsterdam (by year-end).
Rates
US Treasuries yields lowered by 10 to 15bps on the week (after US June CPI was released at 3% vs 3.1% expected and 3.3% prior in May).
95% chance to have a Fed rate cut in September (-65bps in 2024).
French vs German 10 year spread at 65bps (low of the 65-80bps range).
US
June PPI at 2.6% vs 2.3% expected and 2.4% prior in May.
EU
Moody’s warned on French debt outlook amid political gridlock.
China
Chinese regulator suspended securities relending (ie, short-selling ban).
40 Chinese banks vanished in June on NPL (Non Performing Loans).
Largest monthly trade surplus in 24yrs, near $100bn in June (jump in exports while imports declined unexpectedly).
Nota Bene
US Bond yield inversion (35bps) for the 2yr-10yr but dramatic steepening (5bps) for the 2yr-30yr (was still at 35bps mid-June).
Most recent Atlanta Fed estimate for US Q2 GDP is currently at 1.7% vs 4.2% in May and 2.2% in June.
CALENDAR
- China June Retail Sales, Industrial Production, GDP YoY, YtD to be released on Monday
- ECB rate decision on Thursday (before this on Wednesday EU June CPI publication and US June Industrial Production)
- Corporate earnings releases: Goldman Sachs, BlackRock (15 July), Richemont, Bank of America, Morgan Stanley, Rio Tinto (16), ASML, Johnson & Johnson, BHP (17), TSMC, Novartis, BlackStone, Netflix, Abbott (18), Amex, Haliburton, Reliance (19)
WHAT ANALYSTS SAY
- Tikehau Capital - Strategic focus US High Yield
- World Gold Council - June Gold ETF data
- UBP - House view, July 2024 (Macroeconomy, Fixed Income, Equities, Hedge Funds)
Tikehau Capital, Newsletter June 2024 – Strategic focus US High Yield
Author: Erika Morris, Portfolio Manager
The U.S. high yield market posted a strong month in June returning +0.9%. A muted new issue market, declining default rates and a strengthening view of a soft landing fuelled the positive returns this month.
The Automotive sector (+7%) and Healthcare sector (+6%) outperformed this month while Cable and Telecom underperformed. While much attention was focused on EVs this month, the gain in the auto sector was largely from Carvana moving higher. Political rhetoric in the U.S. is heating up and will likely continue through the coming months in addition to ongoing political issues out of France and Germany.
New issue activity came in at only $18bn following five months of over $20bn in monthly volumes. June's default rates and distressed exchanges were also at very low levels with the LTM default rate dropping to 1.2% or 90bps lower since the start of the year.
The Tikehau Focus Fund returned +1.2% in June after lagging the broader high yield market last month. Several Media/Telecom names and one Broadcasting name moved up in the portfolio during the month despite Media/Telecom being one of the underperforming sectors in the broader high yield indices. The worst performing credit this month was one we reduced exposure to which was well timed as it had minimal impact on overall portfolio returns. One portfolio company that announced it was in discussions with a direct lender to potentially refinance the capital structure was actually upgraded by a rating agency this month. This is quite important as it supports our strategy in that we believe the underlying companies in the portfolio are better quality companies than the ratings suggest.
If direct lenders and other private debt/equity managers are willing to refinance some of the portfolio companies it should provide additional support and liquidity to this part of the high yield market. We have discussed our positive outlook on infrastructure related credits and, admittedly, we were perhaps early in that we have not seen the overall price improvements on infrastructure related exposure in the portfolio. Recently one name in the portfolio was awarded a railroad bridge construction contract which we believe may be the early signs that the much anticipated infrastructure spending money will be deployed after many years of watching and waiting. We look forward to more updates on that sector of the market.
World Gold Council, 9 July 2024 – June Gold ETF data, sustained inflows in June narrowed H1 losses
Author: WGC
Following the strongest month since May 2023, global gold ETFs have now seen inflows two months in a row; in June, notable European and Asian buying offset outflows from North America. Although June and May inflows helped limit global gold ETFs’ y-t-d losses to US$6.7bn (-120t), this remains the worst H1 since 2013 – both Europe and North America saw hefty outflows while Asia was the only region with inflows.
A stronger gold price and recent inflows pushed the total AUM to US$233bn, but collective holdings remain near their lowest since 2020
Trading volumes across different gold markets witnessed a mild decline in June; however, the H1 average remains well above its 2023 level as OTC and futures trading were exceptionally active.
UBP Chief Investment Office, July 2024 – House view
Author: Michael LOK, group CIO, co-CEO Asset Management
Equity markets rallied during the first half of the year, driven by earnings growth, a macro backdrop that was more resilient than expected, and continued appetite for AI winners (the “Magnificent 7”). Looking ahead, we anticipate a broadening of equity markets’ leadership.
- Macroeconomy
US confidence in the industrial and services sectors stalled at the quarter end, reflecting uncertainties about global trade and the elections.
- Fixed income
We repositioned portfolios to a shorter duration of three years and increased our carry sources by adding exposure to high-yield bonds.
- Equities
Cautious on French equites, we see better prospects for UK and Swiss equities.
- Hedge funds
Managers in both credit and equities continued to benefit from dispersion triggered by disappointing earnings or refinancing issues.
- Risk-taking paid off
With equity markets rallying despite 10-year US Treasury yields rising above 4.5%, risk-taking was rewarded during the first half of the year. Momentum has been propelled by earnings growth and the “Magnificent 7”, a group of companies leading the artificial intelligence revolution. Overall, underinvesting in risk assets was detrimental to the portfolio, as high-yield bonds delivered robust gains.
During the past six months, we have broadened our outlook beyond the United States and accumulated regional laggards such as Switzerland, Japan, and the United Kingdom which is still trading at a discount. Our main convictions generated solid returns; however, we decided to balance risks on the technology sector after its stellar performance. The S&P 500 Information Technology index, trading at a 30 times forward price-to-earnings (P/E) ratio, is currently above its historical average, and we foresee a deceleration in earnings growth for the upcoming quarter. While we remain strongly positive on the sector, we adjusted our view in June.
Looking ahead with optimism to the second half of the year, we expect the market leadership to broaden further, albeit with a pause in US equities. We also foresee a slight deceleration in US growth, which could prompt the Fed to cut rates by year end. Nonetheless, geopolitics will remain the main risk over the coming months, particularly with the upcoming US elections in November potentially increasing market volatility.
Hedge funds appear suitable to building portfolios that are resistant to market fluctuations.
In France, the victory of the leftist coalition in the parliamentary elections is likely to result in political gridlock, leading to a government with a minimal policy agenda focused on maintaining the status quo rather than pursuing significant reforms. Within European equities, we continue to prefer Swiss and UK equities, which are benefiting from reduced political risks, a cyclical economic recovery, and accommodative monetary policies.
- A summer liquidity surge unfolding
Following USD 300 billion of liquidity flowing in to support markets in May, an additional USD 150 billion was added in June, helping to underpin the rally moving into the summer.
With former President Donald Trump’s polling numbers rebounding in the seven key battleground states that will decide the outcome of the 2024 US presidential elections, and betting markets placing a 52% probability of a Trump victory in November, President Biden has begun deploying policy tools in an attempt to narrow the gap, much like former President Obama did in 2012 to secure a second term in office.
As voters are citing inflation as a key economic concern, the Biden administration has released strategic reserves of gasoline, pushing gas prices down by 5% since May ahead of the summer driving season. Unbudgeted student loan forgiveness has contributed to a USD 400 billion widening in Congressional Budget Office deficit estimates since February, while the Internal Revenue Service looks set to process over USD 80 billion in tax credits this summer to support households and small businesses in the run-up to the July Democratic National Convention.
Beyond this, with nearly USD 1.1 trillion between the US Treasury’s General Account and the Fed’s Reverse Repo facility, we estimate that between USD 400–800 billion in liquidity is available to be deployed going into the election, mirroring the USD 400+ billion that fuelled the nearly 10% rise in the S&P 500 from the May lows.
Much as the rally from the October 2023 lows has been led by a combination of surging liquidity and a technology-driven earnings recovery in the S&P 500, the summer months should see not only another liquidity surge as outlined above, but also a broadening of earnings growth momentum beyond the technology sector.
Recall, the tech sector’s outperformance resumed following its earnings contraction in late 2022 and early 2023, with earnings’ recovery peaking in early 2024.
However, non-technology sectors saw earnings contract through most of 2023 but now look set to accelerate as earnings are reported this summer and into 2025.
Therefore, with the summer liquidity surge unfolding as expected, the coming earnings season beginning in July should confirm this broadening in the earnings growth momentum trend and provide the catalysts for the next leg to the 2024 equity bull market in the months ahead.
Contacts
Main office
1-5, № 53, 12 Charents Str., Yerevan, 0025
+37410 59-55-56
Broker
+374 43 00-43-82
broker@unibankinvest.am
research@unibankinvest.am
info@unibankinvest.am
Disclaimer
The information presented in the document contains a general overview of the products and services offered by OJSC Unibank (registered trademark – Unibank INVEST, hereinafter referred to as the Bank).
The information is intended solely for the attention of the persons to whom it is addressed. Further dissemination of this information is allowed only with the prior consent of the Bank.
The information is only indicative, is not exhaustive and is provided solely for discussion purposes. The information should not be regarded as a public offer, request or invitation to purchase or sell any securities, financial instruments or services. The Bank reserves the right to make a final decision on the provision of these products and/or services to a specific customer, including refusing to provide products and/or services if such activities would be contrary to applicable law.
No guarantees in direct or indirect form, including those stipulated by law, are provided in connection with the specified information and materials. The information presented above cannot be considered as a recommendation for investing funds, as well as guarantees or promises of future profitability of investments.
