Market Musings 290423: Europe, UK, Japan, Gold lead the way higher

Market Musings 290423:
Europe, UK, Japan, Gold lead the way higher

Europe and UK continue to outperform the US

Summary:

• What happened this week - economy and markets

• I stay positive on strong uptrends in Europe (France) and UK equities

• Japanese equities quietly break out

• Gold achieves a new all-time monthly high of $1990/ounce, I still like precious metals

• Sell in May and go away? Statistically speaking, perhaps better to wait until June…

• Stock to research further: IOF Iofina

Podcast:
Why money market funds are the new must-have for investors

In this podcast Edmund Shing gives a crash course in money market funds.

· Definition of money markets

· Advantages today

· Why is this “deposit flight” happening now and will it continue?

· Will this contribute to ongoing stress in the US banking system?

· Geographical comparison between the US and Europe

What happened this week (in short)

1. US inflation is slowing (core PCE, the US Federal Reserve’s preferred measure), but not that much. The Fed is very likely to raise US interest rates next week, to 5.25%. Hopefully this will be the peak interest rate in this cycle, but this will depend on whether US inflation falls faster over the coming months (as I expect).

2. Eurozone growth is basically flat in Q1 2023: Spain and Italy showed decent growth, France OK but Germany disappointed with no growth at all in Q1. Clearly, German industry is still suffering from the aftereffects of the energy crisis, greater competition in car production from China (BYD), the US (even Tesla!) and South Korea (Hyundai, Kia). They are still paying for their slow start in electric vehicles.

3. In contrast, underlying US growth was actually strong in Q1 (once one strips out volatile items like inventories) - US final demand grew +3.2% on an annualised basis in Q1, underlining that US consumers are still spending. However, this will clearly not last and there is still a high chance of US recession sometime later this year.

4. Long-term interest rates (10-year government bond yields) stable to lower - US 3.4%, UK 3.7%, Germany 2.3%.

5. Q1 US and European company results are so far a bit better than expected: especially in Europe, most companies reported better-than-expected Q1 results. In the US, sales growth was positive (thanks largely to price increases) but earnings growth is so far negative, as profit margins fall.

6. In US banking, First Republic Bank is likely to be nationalised by the FDIC: yet another US regional banking failure, FRB was another US regional bank that expanded too rapidly and has suffered from a huge loss of customer deposits.

7. Euro back above USD1.10: the euro has returned to its highest level against the US dollar in a year, but could still yet go higher. In early 2021, it touched USD1.23…

8. Gold hit a new all-time monthly high of USD1990/ounce: with central banks around the world still buying gold for their reserves, and the US dollar moving lower versus most major currencies, gold continues to be a beneficiary of geopolitical tensions. I am still positive on precious metals.

9. European diesel prices are falling on a glut of Russian diesel, and the restart of French oil refineries: French diesel prices have fallen from a 2023 high of EUR1.94 in late January to EUR1.76 today, a relief for hard-pressed European consumers and an effect that should help ease European inflation rates.

What I am focusing on, now

Over last 2 years, US stocks flat, while France and UK lead the way

Source: tradingview. Note: reinvested dividends included

Despite Emerging Markets overall disappointing, Mexico and Indonesia perform well

Source: tradingview. Note: reinvested dividends included

Almost unnoticed, Japanese stocks quietly break to new highs (in pounds)

Source: tradingview.

Is Gold about to go on another epic run higher?

Source: tradingview.

Stock to research further this week

IOF Iofina. UK small-cap, speciality chemicals.

Cheap (11x P/E), high profitability (23% ROCE), strong price momentum.

2022 full year results recently announced, with solid growth, good cash generation and strong activity in 2023 so far.

As usual, Do Your Own Research!

Have a great long weekend

Edmund