Summary
Bond yield and sentiment supports easing
We remain long term bullish markets with Oct. 2022 the likely low. But are turning tactically cautious the 3-month stock rebound speed and strength, and the most exposed Growth stocks. A resilient US consumer, plunged EU natgas, and reopening China has cut growth risks. But sticky inflation is raising bond yields and is a valuation ceiling. Whilst depressed investor sentiment, that added fuel to the rally, is now ebbing.
Stock markets hold on to gains
It was a testing but resilient week for stocks. US inflation came in hot, Treasury bills hit 5%, and USD firmed more. Whilst investors braced for up to three more Fed rate hikes. But a big US retail spending recovery further eased recession fears. European stocks again outperformed, on good earnings. Bitcoin hit a 50% YTD gain. Buffett bought more AAPL and sold TSMC. TSLA fell on big recall. See our 2023 Year Ahead HERE. See video updates, twitter @laidler_ben.
Underlying inflation pressures still easing
US inflation the world’s most important number. January’s 7th decline to a sticky 6.4%. But our inflation tracker gives comfort price rises still on underlying downtrend, 30% off highs.
Sentiment support the latest to flash yellow
Less depressed investor sentiment is an ebbing support to big rally this year. VIX and AAII gained but fund flows and put/call still low.
Europe’s earnings surprise underpins rally
Stoxx 600 near all-time high and best performing region. FTSE 100 and CAC 40 are at records. Big driver is surprising earnings with Q4 EPS +11% vs US -3%, led up by banks and energy.
Japan’s slow-moving but momentous pivot
Naming of new BoJ governor latest step in Japan’ globally big monetary policy pivot. To weaken Yen and tighten world liquidity.
Crypto powers ahead led by Bitcoin
Bitcoin (BTC) led the crypto asset rally higher, nearing $25,000 and a 50% gain this year. Asset class market cap. rose over $1 trillion and bitcoins ‘dominance’ over 40%. Polkadot (DOT) built further on prior gains. US regulator actions continued as NY Fed told Paxos to stop minting BUSD stablecoin, driving outflows.
Dollar strength holds back commodities
Dollar strength, and lower oil prices with the US announcing more strategic reserve sales, held back commodities again. Worst performing asset class this year, after leading in prior two. Copper resilient as key China property sector saw new home prices rise. Cocoa new 1-yr high on supply shortages and as demand rebounds.
The week ahead: flash PMI’s and the Fed
1) Global flash PMI (Tue) recovery and inflation health check. 2) FOMC minutes and Fed favourite PCE, with market now pricing 3 more hikes. 3) US earnings with WMT, HD, NVDA, plus BABA, BHP. 4) US President Day break (Mon), Pancake Day, and Ukraine invasion anniversary.
Our key views: A clear but gradual recovery
See gradual recovery with plenty bumps in road. The inflation and interest rate shock is slowly easing, and global recession risks have faded. Short term momentum to ease with sentiment less bad and bond yields higher. Focus cheap and defensive assets. Higher risk crypto, tech, small cap as inflation fall picks up.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | -0.13% | 1.35% | 2.05% |
| SPX500 | -0.28% | 2.68% | 6.24% |
| NASDAQ | 0.59% | 5.81% | 12.62% |
| UK100 | 1.55% | 3.01% | 7.42% |
| GER30 | 1.14% | 2.98% | 11.19% |
| JPN225 | -0.57% | 3.61% | 5.444% |
| HKG50 | -0.57% | 3.61% | 5.44% |
*Data accurate as of 20/02/2023
Market Views
Stock markets hold on to gains
- A testing but resilient week for stocks. US inflation came in hot, raising bond yields and firming USD. Whilst investors now braced for three more Fed rate hikes. But a big US retail spending recovery further eased recession fears. European stocks again outperformed, on positive earnings. Buffett bought more AAPL and sold TSMC. TSLA fell on big recall. See our 2023 Year Ahead View HERE.
Underlying inflation pressures still easing
- US inflation is the biggest number in global markets. It’s driving the Fed rate cycle and macro and earnings recession risks. Plus the Fed is ‘data dependent’ Headline January inflation saw a 7th straight slowdown to 6.4%. But it was a bit stickier than expected, and markets have re-priced to three more rate hikes to a 5.25% ‘terminal rate’.
- But our inflation tracker gives comfort that price rises are still on an underlying downtrend. The median is down 30% from peak and down 3% on in the past month. Supply chains, goods, housing, and commodities are all falling fast, with wages and services the traditional laggards that will need more time and patience.
Sentiment support the latest to flash yellow
- Very depressed investor sentiment has been an important contrarian support to equity markets. It has added fuel to the turn up in the fundamentals and resulting sharp stock ‘pain trade’ rally. But our proprietary investor sentiment indicator (fund flows, put/call ratio, VIX, AAII retail) now shows this support ebbing.
- This may overstate the sentiment recovery, with VIX ‘broken’ and investor allocations still very cautious, but it is another flashing yellow warning light for markets. It comes alongside rising bond yields that will put a ceiling on some valuations.
Europe’s earnings surprise
- Europe’s Stoxx 600 index is within 5% of its all-time high and is best performing region this year. UK’s FTSE 100 and France’ CAC 40 are already at records. A big driver is the surprising earnings performance.
- Europe’s 11% Q4 growth is outpacing S&P 500’. And confounding low investor expectations. Surprises are driven by heavy-weighted energy and financials. This is driving higher profit margins, in contrast to the US. Europe’s still below-average valuations give it extra support, alongside the better fundamentals from 80% lower natgas prices and a reopening of China. See @EuropeEconomy.
Japan’s slow-moving but momentous pivot
- Japan’s slow-moving but potentially momentous monetary policy pivot took another step forward. With naming of Kazuo Ueda as replacement for long-standing Bank of Japan Governor Kuroda.
- A hawkish BoJ and increase in yield curve control ceiling is coming. Before hike of -0.1% policy rate in 2024. The impacts are large, and global. It could boost Yen, still world’s cheapest big currency. Could be headwind to exporters, and help banks. May tighten global liquidity and raise US and EU bond yields as policy divergence narrows and capital outflows reverse. See @AsianDragons.
eToro composite investor sentiment index vs S&P 500 index
Crypto rally resumed led by Bitcoin
- The crypto asset rally resumed, tracking the positive tone in global markets. Bitcoin (BTC) led major coins higher and approached $25,000. Other big gainers included Ethereum layer 2 platform Polygon (MATIC) and Polkadot (DOT).
- This is a six month Bitcoin high and a 50% rally this year. Crypto is the best performing asset class this year. This took asset class market cap. over $1 trillion and bitcoin ‘dominance’ over 40%.
- The acceleration of US crypto regulatory actions continued. The NY Fed told Paxos to stop minting new Binance USD. This follows the prior week shutdown of Kraken’s US staking service by SEC.
Dollar strength holds back commodities
- The continued US dollar rally helped hold back commodities, and with oil prices falling after recent strength and on US strategic reserve sale.. Commodities is the worst performing asset class this year, after leading for the past two.
- Copper showed some price resilience as data showed early signs of a recovery in the key Chinese property sector. New home prices rose for the first time in a year. China represents around 60% of global copper demand.
- Cocoa prices set a new 1-year high as the market tightens. With top producer, Ivory Coast, seeing supply shortages, whilst global inventories are low, and chocolate demand rebounding.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | 0.04% | 6.77% | 12.86% |
| Healthcare | -0.11% | -1.92% | -2.16% |
| C Cyclicals | 1.69% | 7.00% | 16.39% |
| Small Caps | 1.44% | 3.29% | 10.51% |
| Value | -0.40% | -0.62% | 1.95% |
| Bitcoin | 14.18% | 16.36% | 50.22% |
| Ethereum | 11.80% | 7.89% | 43.28% |
Source: Refinitiv, MSCI, FTSE Russell
The week ahead: Flash PMI’s and the Fed outlook
- Tuesday’s flash PMIs from Japan, Australia, EU, UK, and US set to show a further rise, validating easing global recession fears. Focus will also be on ‘prices paid’ for clues to stubbornly sticky inflation.
- Latest FOMC meeting minutes and Fed’ favourite PCE inflation report (Fri), seen easing from 5%. Investors been raising forecasts for end of Fed rate hikes. Now expecting 3 x 0.25% more hikes.
- End of US Q4 earnings with retailers WMT, HD, TGX, and tech’s NVDA, AMT, INTU, PANW plus overseas heavyweights BABA, BHP, HSBC, RIO. Overseas EPS growth has been outpacing the US.
- US markets are closed (Mon) for Presidents Day. Shrove Tuesday ‘Pancake day’ seen its ingredients cost +36% in a year. Friday is 1-year anniversary of Russia’s February 24th, invasion of Ukraine.
Our key views: A clear but gradual recovery
- See gradual recovery with plenty of bumps in road. The US inflation and interest rate shock is slowly easing, and global recession risks faded with China reopening and plunged natgas. But short term equity market momentum to ease with investor sentiment now less bad and bond yields higher.
- Focus cheap and defensive assets, from high dividend yield, to healthcare, and UK. With higher risk crypto, tech, and small cap assets as the inflation fall picks up and de-risks markets. Overseas markets to lead the US. Commodities and the US dollar to take a performance back seat.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | -1.97% | -4.99% | -5.56% |
| Brent Oil | -3.90% | -5.14% | -3.30% |
| Gold Spot | -1.34% | -3.96% | 1.16% |
| DXY USD | 0.24% | 1.83% | 0.35% |
| EUR/USD | 0.16% | -1.48% | -0.07% |
| US 10Yr Yld | 8.38% | 34.19% | -5.80% |
| VIX Vol. | -2.48% | 0.86% | -7.61% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: turning tactically cautious
Long term bullish and Oct. 2022 likely low, but tactically cautious on rebound speed and strength
We update our market recovery tracker (see below). Markets had a blistering start to the year, confounding consensus. This has been driven by less bad fundamentals and terrible investor sentiment. But we are not out of the woods yet. Rising bond yields will bring an end to recent valuation relief. Whilst sentiment is turning less depressed. This is partly offset by delayed recession and earnings fears. We remain long term positive but turn tactically cautious the blistering speed and size of this latest Growth stock-led rebound.
Very depressed sentiment has added fuel to the rally, but this support is now ebbing
Very depressed investor sentiment has been an important contrarian support to equity markets. But our proprietary investor sentiment indicator (of fund flows, put/call ratio, VIX, and AAII survey) now shows this support ebbing. This may overstate the sentiment recovery, with the VIX ‘broken’ and investor allocations still very cautious. But it is another flashing yellow warning light for markets in the short term.
Sticky inflation pushing up global bond yields again and putting a ceiling over valuations
Sticky inflation and cautious central banks are pushing up terminal interest rate expectations and bond yields. Stock valuations are simply the present value of future cash flows, and these higher yields cut valuations. These risks are greater in the most expensive assets, like the technology sector (at a 21x price/earnings ratio) or the US S&P 500 index (18x). Whilst lower in cheaper regions like Europe (12x), or sectors, with energy, telecoms, and banks all trading on P/E ratios of 10x P/E or less, for example.
Whilst a resilient US consumer, plunged EU natgas prices, and reopening China cut growth risks
Balancing these rising valuation and positioning risks are lower near-term GDP and earnings risks. PMIs are back over the recession break-even of 50. Q4 US earnings are down ‘only’ 3% and Europe’s up 11%. Lower inflation is starting to help consumer purchasing power. But a significant GDP slowdown remains ahead with high-for-longer interest rates. US and European recession probabilities are still uncomfortably high.
Four markers to track: interest rate peak, worst of growth, low valuations, terrible sentiment
Every cycle is different, but sustainable market recoveries typically need to see the most of 1) a peak in inflation and interest rate worries, 2) a trough in growth fears, 3) low equity valuations, and 4) bad investor sentiment. Three of these are currently neutral/yellow on our ‘traffic lights, whilst we are a long way from the growth trough. This is enough to argue October was likely the market low, but not that we are in a new bull market. The inflation and interest rate shock is easing but not over. Most growth slowdown to come.
eToro Bear Market Recovery tracker
Key Views
| The eToro Market Strategy View | |
| Global Overview | Aggressive Fed interest rate hiking cycle and stubborn inflation boosted uncertainty, recession risk, and hit markets. We see this gradually fading in 2023, with global growth stressed but resilient, inflation pressure slowly easing, and valuations now more attractive. Focus on cheap and defensive assets for a gradual ‘U-shaped’ market recovery. |
| Traffic lights* | Equity Market Outlook |
| United States | World’s largest equity market (60% of total) seeing slowing but resilient GDP and earnings growth. Valuations led the market rout, and now below average levels, and are supported high company profitability and near peaked bond yields. Fast Fed hiking cycle boosted recession risks. Focus on cash-flows defensives, like healthcare and high dividend. Big-tech supported by defensive growth. See gradual ‘U-shaped’ rebound as inflation slowly falls and de-risks market. |
| Europe & UK | Favour defensive and cheap UK equities (‘Economies are not stock-markets’) over high risk/high return continental Europe. Recession risks high with Russia and energy crisis, threatening to overwhelm ‘buffers’ of rising fiscal spending (defence and refugees), low interest rates (slow to raise ECB), and weak Euro (50%+ sales from overseas). Equities partly cushioned by lack of tech, and 25% cheaper valuations vs US. Favour cheap and defensive UK over Continent. |
| Emerging Markets (EM) | China, Korea, Taiwan dominate EM (60% wt.), and more tech-centric than US. Positive on China as economy reopens, cuts interest rates, and eases tech regulation crackdown. Valuations 40% cheaper than US and market out of favour. Recovery helps global sectors from luxury to materials. Broader EM needs weaker USD and peak US rates catalyst. |
| Other International (JP, AUS, CN) | Canada and Australia benefit from strong equity market weight in commodities and financials, if global growth resilient and bond yields risen. Japanese equities among cheapest of any major market, benefit from weaker JPY and with low inflation, offsetting structural headwinds of low GDP growth, an ageing population, and world’s highest debt. |
| Traffic lights* | Equity Sector & Themes Outlook |
| Tech | ‘Tech’ sectors of IT, communications, consumer discretionary (Amazon, Tesla), dominate US and China. Hurt by higher bond yields and above average valuations. But structural stories with good growth, high margins, fortress balance sheets support some. ‘Big-tech’ attractive new recession defensives. ‘Disruptive’ tech is much more vulnerable. |
| Defensives | Core positions as macro risks rise and bond yields are better priced. Consumer staples, utilities, real estate attractive defensive cash flows, less exposed to rising economic growth risks, and robust dividends. Offset impact of higher bond yields. Healthcare most attractive, with cheaper valuations, more growth, some rising cost protection. |
| Cyclicals | Higher risk cyclical sectors, like discretionary (autos, apparel, restaurants), industrials, energy, and materials, are cheap and attractive if see a ‘slowdown not recession’ scenario. Are select but high risk opportunities from energy to financials stocks. With often depressed earnings, cheaper valuations, and have been out-of-favour for many years. |
| Financials | Benefits from high bond yields, charging more for loans than pay for deposits. Also one of cheapest P/E valuations, and with room for large dividend and buyback yields. But can be outweighed by high recession risks, with lower loan demand and higher defaults. Banks most exposed. Insurance and Diversifieds (like Berkshire Hathaway) the least. |
| Themes | We favour Value over Growth on GDP resilience, lower valuations, rising bond yields, under-ownership after decade under-performance. Dividends and buybacks recovering with cash flows. Power of dividends under-estimated, at up to 1/2 of total long term return. Secular growth of Renewables and Disruptive Tech investment themes. |
| Traffic lights* | Other Assets |
| Currencies | USD ‘wrecking ball’ driven by rising Fed interest rates and ‘safer-haven’ bid. Many DM currencies hurt by still low interest rates and struggling growth. ‘Reverse FX war’ interventions ineffective. Strong USD hurt EM, commodities, US foreign earners like tech. But helps big EU and Japan exporters. Stabler USD outlook as near top of Fed cycle. |
| Fixed Income | US 10-year bond yields risen above prior 3.5% peak, as Fed hikes continue aggressively and balance sheet runoff accelerates. Set to ease as recession risks rise and inflation expectations fall. Additionally US has a wide spread to other market bond yields, and structural headwinds of all-time high debt, poor demographics, low productivity. |
| Commodities | Strong USD and rising recession fears hit commodities. But still above average prices helped by GDP growth, ‘green’ industry demand, supply under-investment, recovering China, Russia supply crisis. Oil helped by slow return of OPEC+ supply and Russia 10% world oil supply problems. But commodities not to repeat their 2022 performance leadership. |
| Crypto | In the latest ‘crypto winter’ (16th crash for bitcoin) with dramatic and early asset class sell-off and later specific risk events from Luna to FTX. See long term asset class development with small size under $1 trillion, correlations low, regulation growing, development/catalysts continuing – Ethereum merge to proof-of-stake and coming BTC halving. |
| *Methodology: | Our guide to where we see better risk-adjusted outlook. Not investment advice. |
| Positive | Overall positive view, and expected to outperform the asset class on a 12-month view. |
| Neutral | Overall neutral view, with elements of strength and weakness on a 12-month view |
| Cautious | Overall cautious view, and expected to underperform the asset class on a 12-month view |
Source: eToro
Analyst Team
| Global Analyst Team | |
| CIO | Gil Shapira |
| Global Markets Strategist | Ben Laidler |
| United States | Callie Cox |
| United Kingdom | Adam Vettese Mark Crouch Simon Peters |
| France | Antoine Fraysse Soulier David Derhy |
| Holland | Jean-Paul van Oudheusden |
| Italy | Gabriel Dabach |
| Iberia/LatAm | Javier Molina |
| Nordics |
Jakob Westh Christensen |
| Poland | Pawel Majtkowski |
| Romania | Bogdan Maioreanu |
| Asia | Nemo Qin Marco Ma |
| Australia | Josh Gilbert |
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