Market Musings 080423: Charting the markets

Market Musings 080423: Charting the markets

When a picture is worth a thousand words
(and when I don’t feel like writing much over a long weekend…)

Summary

• Price pressure PMI components point to lower inflation ahead

• GBP Sterling has been the strongest major currency over Q1 2023

• US dollar looks set to follow US manufacturing activity lower

• European company profit margins at a record high

• Long-term asset class return expectations from JPM

• Trend-following hedge funds are max short stocks at the moment

• Nasdaq 100 still trending higher, Euro STOXX 50 back at year high

• UK long-term bonds should rally, following US bonds

• An interesting read on 35 years of financial crises and stock market reactions

Podcast: The Opec+ Oil Ambush

• The facts

• The crude oil price

• Political tensions

• What is your 12-month forecast for oil?

• What is your current view on Commodities as an asset class?

Interesting charts I have found over the last few weeks…

I thought that this week, I would highlight some interesting charts that I have found over the last week or so, together with the conclusions I draw from them.

1. Price pressure PMI components point to lower inflation ahead

Source: Pictet AM

Conclusion: leading price indicators suggest that price pressures have essentially all but evaporated over the last few months. This suggests that inflation across developed economies should ease much lower in the months to come.

2. GBP Sterling has been the strongest major currency over Q1 2023

Source: tradingview.com

Conclusion: despite all the doom and gloom surrounding the UK economy post COVID and post Brexit, sterling has been gaining versus its main trading partners this year. This underlines the fact that the UK economy may still escape a recession this year, with the domestic economy still robust and the housing market not collapsing under the weight of higher interest rates.

3. US dollar looks set to follow US manufacturing activity lower

Source: BCA Research

Conclusion: US manufacturing is in recession according to the US ISM manufacturing PMI survey, which stands today at well under to 50 breakeven level, pointing to a manufacturing recession. But this is not evident in the rest of the world, suggesting the path for the US dollar could be lower still against major currencies.

4. European company profit margins at a record high

Source: Eurostat

Conclusion: we know that the European stock market is heavily weighted towards economically-sensitive cyclical companies. So it should be no surprise really to find that European companies have benefited from this recent surge in inflation to raise prices to not only cover increases in cost, but also to make extra profits too. In fact, this very point has been noted by the European Central Bank itself… Of course the big question is then, as inflation cools down, can companies hold onto this excess profitability?

5. Long-term asset class return expectations from JPM

Source; JP Morgan

Conclusion: over the very long term, valuations matter – a lot. This is evident from JP Morgan AM’s long-term asset class return expectations, with the cheapest stock markets of China, the eurozone and Japan offering the highest theoretical returns. In contrast, US large-cap stocks are expected to offer the lowest stock market returns - consistent with its high current valuation and fantastic trailing 10-year historic performance.

6. Trend-following hedge funds are max short stocks at the moment

Source: Goldman Sachs

Conclusion: contrarians should buy when this CTA hedge fund positioning indicator suggests that they are at max short positioning, as appears to be the case presently. It certainly worked well in October last year, and again at the beginning of this year…

7. Nasdaq 100 still trending higher, Euro STOXX 50 back at year high

Source; JP Morgan

Conclusion: despite the tightening financial conditions resulting from higher central bank interest rates and the US regional banking stress, both the Nasdaq and the Euro STOXX 50 stock indices continue to trend higher. Even the FTSE 100 is only 3.5% off its 2023 highs…

8. UK long-term bonds should rally, following US bonds

Source; JP Morgan

Conclusion: inflation rates may still be uncomfortably high today, but with the full impact of previous interest rate hikes still to hit the economy, both growth and inflation should slow over the rest of this year, boosting long-term bond prices (on lower yields).

9. An interesting read on 35 years of financial crises and stock market reactions

Source: Jeffries

Jeffries article: Normalcy Returns Faster Than You’d Think After Financial Crises

Conclusion: The Jeffries “glass half-full summary -

“Our world always finds a way forward. In fact, things are usually pretty darn good in a surprisingly short period of time after we avoid the often anticipated “end of the world.” “

Have a great Easter weekend,

Edmund