OUTLOOK: Markets have continued to positively surprise, and we see further gains ahead. The long-duration heavy stock market will disproportionately benefit from peaking Fed interest rates, capped bond yields, and lower inflation. And still poor investor sentiment is a clear support. But returns will likely be harder won from here. Current low stock volatility and strong Q1 cyclicals earnings are diversions, with economic slowdown set to accelerate. Stocks seem complacent to debt ceiling risk and start of weak seasonality is a clear technical headwind. We focus on long duration big tech and traditional defensives and are cautious small cap and commodity cyclicals.
APRIL: Overseas stocks +3.4%, led by UK and India, and again outpacing S&P 500’ 1.5% gain. Long duration and defensive communications and staples stocks led, along with long bonds. Industrials and small cap cyclicals fell, alongside commodities. Corporate profits avoided another cliff-edge fall in Q1, with half reported, and the sharp tech rally showed how out of favour they had become. The US banks scare saw First Republic (FRC) bought by JP Morgan (JPM) in 2nd biggest ever failure, but tightening macro consequences will remain. Debt ceiling concerns started to be reflected in fixed income markets even as equities remained complacent.
MAY: The two highlights will be 1) the likely last Fed rate hike (May 3rd), after a historically fast and furious upcycle, and 2) US debt ceiling X-date coming as soon as June 1st. ECB (4th) and Bank of England (11th) set to press ahead for longer. This may keep supporting EUR and GBP. Data focus will be on US loan officer survey (8th), with conditions tightening, and 10th inflation fall (10th). Turkey’ pivotal election (14th) is the most important of the year, with implications for the long-suffering TRY. Additionally, G7 leaders meet (19-23) in Japan, the latest Black Sea Grain Initiative 60-day extension ends (15th), and the UK see’s King Charles coronation (6th).
All data, figures & charts are valid as of 01/05/2023