Equinox Research

Key Highlights from Our Weekly Newsletter The global equity markets experienced a turbulent week, with investors closely monitoring economic data releases and central bank commentary for clues regarding the trajectory of inflation and interest rates. Despite the volatility, most major indices managed to eke out gains, buoyed by optimism surrounding the potential easing of inflationary pressures and prospects of future rate cuts. The U.S. stock market emerged as a standout performer, with the S&P 500, Nasdaq, and Dow Jones Industrial Average all scaling new record highs, primarily fueled by the softer-than-expected U.S. consumer price index (CPI) data for April. The commodities markets exhibited a diverse range of movements during the week, as various asset classes responded to a complex interplay of factors, including economic data, supply dynamics, and geopolitical tensions. Oil prices experienced a rollercoaster ride, finding support from signs of improving demand in the U.S. and China, as well as potential supply disruptions. Precious metals, particularly gold and Bitcoin, experienced significant volatility throughout the week, initially retreating ahead of the crucial U.S. inflation data release but staging a strong rebound following the softer-than-expected CPI print. The week saw a rollercoaster ride for U.S. Treasury yields as investors closely parsed key inflation data and comments from Federal Reserve officials for clues on the path ahead for interest rates. Investor sentiment was initially buoyed by the softer-than-expected U.S. CPI data for April, fueling hopes that the Federal Reserve might cut interest rates sooner rather than later. However, the focus quickly shifted to the divergence between the Fed and the European Central Bank's (ECB) policy paths, with remarks from ECB officials highlighting the uncertainty surrounding rate cuts beyond June. The divergence in policy outlook was reflected in the spread between U.S. 10-year Treasury yields and German bund yields, a gauge of expected policy path divergence. By the end of the week, this spread had tightened to around 190 basis points, with markets pricing in approximately 46 basis points of Fed rate cuts for 2024, while ECB rate cut expectations stood at around 68 basis points. In the euro zone, bond yields initially declined after the softer U.S. CPI data but rebounded on Friday as cautious remarks from ECB officials dampened expectations for aggressive rate cuts beyond June.

Key highlights from our weekly newsletter The mighty dollar's reign carries immense power but also systemic perils. Though the U.S. accounts for just 15.5% of global output, the dollar dominates 88% of forex trades and 58% of reserves. This skews America away from export industries while enabling punitive financial sanctions. However, the very forces driving dollar dominance contain seeds of its potential downfall. The global system thrives on abundant, cheap dollars fueling economic activity worldwide. But the robust U.S. rebound has forced the Fed to aggressively hike rates, sending the dollar soaring and stressing debtors globally. For now, cooler heads can navigate the volatility. But if swings grow large and protracted, emerging and frontier markets could destabilize, politicizing the currency issue along nationalist lines. The wildcard is whether a future administration explicitly pursues a weak dollar policy of devaluations and trade wars to revive domestic manufacturing, as Trump allies like Robert Lighthizer proposed. Such an all-out dollar assault would be an existential shock to the Bretton Woods system America itself created then abandoned under Nixon. America's democratic crisis now risks spilling into global markets. Some parties still benefited from Trump's tariff battles with China that suppressed both nations' investment and growth. Notably, Mexico saw exports to the U.S. rise as firms rerouted supply chains there to bypass U.S. tariffs on China, especially in machinery and auto parts hit hardest by U.S. steel duties. While losers outnumber winners in a trade war overall, Mexico's experience underscores how seemingly entrenched trade patterns can rapidly shift amid protectionist shocks. This flexibility to rearrange global production networks likely explains why the U.S. never onshored manufacturing despite the conflict. Reverting to 20th-century territorialism remains inefficient versus chasing lowest-cost locations in an open, rules-based system. China's stocks outperformed strongly in April on optimism for policy easing around the troubled property sector. Though the macro backdrop remains deflationary, several factors buoy the tactical outlook. First, state-linked funds establish a perceived market floor preventing capitulation. Second, Beijing's aggressive push for higher dividends and buybacks succeeds. Third, regulators progressively dismantle property cooling measures as overhangs cripple the crucial sector. However, structural challenges persist in still-depressed valuations. Material upside likely hinges on catalysts like private sector credit impulses or explicit property debt guarantees triggering a broader recovery. But contrarian value and cashflow plays remain for investors able to withstand volatility.

Highlights from last week's newsletter: The S&P 500 captured a record 27% of global equity ETF flows in 2023, surpassing the previous peak, as US equities, led by tech giants, continued to outperform. Demand was driven by the S&P 500's strong 2022 gains and investor expectations of a bull market, potentially due to interest rate cut prospects. Meanwhile concentration risk in global equities has reached a decades-high, with the 10 largest stocks now making up nearly 22% of the MSCI World Index. This reduces diversification as investors are heavily exposed to the US economy and sentiment. While US equities appear overvalued, non-US markets offer better value. Investors are pricing US earnings multiple times higher than elsewhere, not fully explained by growth potential. European equities look particularly attractive but the region faces some challenges from the energy crisis, Chinese imports, and potential US trade war, requiring productivity-boosting policies to maintain competitiveness. Global markets faced turbulence in the first week of Q2 2024. In the US, the Dow and S&P 500 had their worst weekly performance of the year, driven by rising oil prices and hawkish Fed signals. This sowed doubt about the timing of rate cuts. European markets also fell, weighed down by ECB rate hike concerns and rising bond yields. Asian markets had a mixed start, with sentiment shifting bearishly mid-week on inflation and rate hike worries. Crude oil prices surged to 5-month highs on geopolitical tensions and supply disruptions. Gold prices soared to new records, driven by rate cut expectations and safe-haven demand. Bitcoin showed volatility, initially retreating from highs before rebounding on ETF inflows and halving anticipation. US Treasury yields spiked as strong economic data reduced rate cut expectations. European yields also saw volatility, initially rising before falling as Eurozone inflation cooled. Investors are now closely watching upcoming US data for further Fed policy clues.

Key Highlights from Last Week Markets grapple with uncertainty as economic crosswinds intensify. The inflation trajectory remains stubbornly high, clouding the Federal Reserve's policy path. Core inflation stays elevated at 3-4%, overshooting the 2% target. This stickiness, combined with a tight job market, raises doubts about the Fed's projected rate cuts in 2024. Meanwhile, the bond market exhibits extreme sensitivity to data surprises, with volatility exceeding 2008 crisis levels, reflecting pervasive uncertainty around inflation and economic landing. Despite headwinds, optimism emerges about potential upside drivers for US growth. A synchronized global easing cycle could boost exports and risk assets, creating positive wealth effects. Productivity gains from tight labor markets and AI efficiencies offer another tailwind. Lower mortgage rates may spark a housing rebound after years of drag. Additionally, stabilizing global demand could aid a manufacturing resurgence. While no single catalyst needs to fully materialize, these self-reinforcing paths currently buoy sentiment and risk appetite. Amidst the flux, pockets of opportunity arise. UK equities trade at puzzling discounts to US and European peers, a potential Brexit hangover. Small-cap underperformance versus large-caps sets the stage for a reversal if catalysts like risk appetite and M&A activity reemerge. Trump's social media venture sees a spectacular debut, minting billion-dollar fortunes for partners. However, navigating the volatility requires vigilance as uncertainty persists across asset classes. In commodities, diverse dynamics unfold. Energy markets grapple with supply concerns and demand uncertainties. Cryptocurrencies showcase resilience, with Bitcoin surpassing $70,000 before retreating on Fed rhetoric. Base metals experience a mixed performance, while agricultural commodities face supply tightness. Interest rates remain elevated amid economic crosscurrents, as central banks navigate a delicate policy balance. Please download the PDF for full details.

The S&P 500 hit a record 5000 but gains were driven by mega-cap tech stocks like Nvidia and Meta, while most of the index lagged. Inflation stayed stubbornly high despite hopes of a slowdown, pushing back expectations for Fed rate cuts. Earnings were mixed with Cisco disappointing but Airbnb rebounding. Layoffs continued at major tech firms like Amazon despite low unemployment. Other key events included the US court ruling Trump can be prosecuted over 2020 election claims, China replacing its securities regulator head, and Senegal's election delay bringing crisis warnings. Global stock markets experienced volatility amid uncertainty surrounding interest rate hikes. The S&P 500 hit a record high, boosted by strong earnings, while facing pressure from hawkish Fed rhetoric. European shares saw mixed trading as ECB cut expectations eased after robust U.S. payrolls data. Asian equities fluctuated, with Chinese stocks rebounding and Japan's Nikkei reaching highs. Commodities pulled back due to concerns over global demand, except for cocoa, which surged on supply shortages. Treasury and European bond yields rose, reflecting economic strength and central bank caution. Hawkish signals suggest yields may continue to rise, although risks persist.

Highlights from last week market performance: The U.S. economy shows resilience at 2.1% growth, but the Eurozone faces challenges, with Germany's economy possibly shrinking by 0.5%. Higher interest rate expectations burden small businesses. Strong employment figures influence optimism about the Federal Reserve's stance on rate cuts. Earnings season reveals insights into the economy's strength, with a focus on tech and banking stocks. Pepsico's results are affected by the decline in snack and cola consumption due to weight loss drugs. Tech world developments include Tesla's price reductions and Microsoft's tax dispute. Financial sector challenges include expected high loan write-offs and MedTech stocks declining. Citigroup undergoes significant restructuring, and BlackRock experiences outflows. The United Auto Workers' strike reflects the shift to electric vehicles. The S&P 500 initially reacted but rebounded to reach a two-week high. Resilience was demonstrated despite concerns about oil market disruption and Federal Reserve's cautious stance. Corporate earnings varied, with companies like JPMorgan and BlackRock surpassing profit expectations while others faced challenges. Despite global issues, S&P 500 and Dow Jones secured weekly gains. In commodities, oil prices fluctuated due to Middle East tensions, while gold surged on geopolitical shocks. Copper gains were short-lived, and agricultural markets adjusted as USDA revised yield estimates. The Israel-Hamas conflict raises concerns about global fertilizer supplies and oil prices. Bond yields fluctuated amidst geopolitical uncertainties.

Will the Economy Survive the Fed? Rising yields spark concern for banks, insurers, and asset managers, with paper losses nearing $400 billion in US banks' bond portfolios. Higher rates pose challenges for private equity and corporations relying on debt financing. Equity markets suffer sell-offs, hitting defensive sectors and even gold and silver. The Fed's cautious approach could lead to a less favorable outcome, and inflation concerns grow. Jobs Surge Raises Economic Strength But Inflation Concerns Loom The US economy gains momentum with a strong jobs report, emphasizing President Biden's economic policies. However, this may pressure the Fed to raise rates and curb inflation, causing a Treasuries selloff. Organized labor gains ground, as the UAW strikes deals with major automakers, reflecting the influence of unions in post-pandemic negotiations. Higher for Longer Spooks Markets The US stock market had a tumultuous week with mixed signals. Relief came on Wednesday as weaker private payrolls eased rate hike worries. A robust jobs report on Friday created a ""Goldilocks"" scenario, despite rising Treasury yields. European stocks declined due to rising bond yields and weak economic data. Oil prices surged initially but plummeted later amid concerns about demand and interest rates. Natural gas prices fluctuated with changing weather patterns. Precious metals, including gold, fell due to a strong US dollar and rate hike expectations. Bitcoin remained resilient. Wheat prices rallied due to Black Sea trade disruption fears, while bond yields surged in the US and Europe due to inflation and central bank policies. The above were some of the highlights from this week's newsletter. Please click below to read more.

Key highlights from Equinox Research Weekly Newsletter: Market participants hold divided opinions on the Fed's future actions, with some expecting rate hikes followed by rate cuts, while others suggest rate cuts as early as 2Q2024 due to tight economic conditions. The Fed's forecast of ""higher for longer"" rates has impacted the housing market and raised concerns about fragility in regional banks and pension funds. The question remains whether the US economy will experience a soft or hard landing due to higher rates, with factors like the Fed's reduced balance sheet and rising public debt influencing policy decisions. A recession could have global repercussions, with major economies already facing challenges. The recent Federal Reserve rate decision maintains flexibility but underestimates recession risks, given various challenges on the horizon. Global indices had a tumultuous week as the Federal Reserve's hawkish stance led to concerns about rising interest rates. The S&P 500 initially saw modest gains but later plummeted, especially in the tech sector. Legal troubles for Amazon added to market unease. However, midweek stabilization offered hope for a fourth-quarter rebound, though stocks struggled to maintain gains as the week ended. European markets faced challenges, with losses early in the week, driven by rising bond yields and concerns about China's economic slowdown. Asian markets mirrored these challenges, with China Evergrande's debt crisis and rising US interest rates impacting stocks. Oil prices hovered around $95 a barrel, with Russia's export policies and supply constraints affecting prices. European gas prices rallied due to disruptions in Norwegian supply, while US natural gas prices found support from declining output and strong short-term demand projections. Copper prices initially declined but rebounded, while India's aluminum market showed growth potential. Treasury yields surged to multi-year highs, reaching 4.583% by the end of the week, driven by inflation concerns and the Federal Reserve's rate hike expectations.

Oil Prices Surge, Fed Holds Steady Oil prices continue to rise, with ICE Brent surpassing $95/bbl, up over 25% this quarter. Tightening fundamentals may push it above $100/bbl, but doubts linger about sustainability. The Federal Reserve refrained from rate hikes, citing data dependence and a shift towards monitoring headline CPI inflation. Oil's rally could impact inflation and trigger more rate hikes if the job market stays strong, affecting stocks and bonds. Debt Challenges Amidst Geopolitical Tensions Pandemic-induced stimulus packages have raised US and European government debt levels. Finding tax revenue sources is crucial, but convincing voters in democracies is daunting. Rising geopolitical tensions like Russia's Ukraine invasion and Western conflicts with China lead to increased military spending, posing challenges in debt reduction.Drug Pricing Reforms and Labor UnrestBiden's drug pricing reforms aim to lower costs for vital medications, allowing Medicare to negotiate prices with pharmaceutical companies. Labor unrest unfolds as auto workers demand higher wages and shorter workweeks. Wall Street faces turbulence due to rising Treasury yields, while the OECD warns of a potential global economic slowdown. Global markets update Global stock markets faced turbulence due to central bank actions and inflation concerns. In the US, the S&P 500 dropped 1% after the Federal Reserve maintained interest rates, causing bond yields to surge to 2007 levels and impacting stocks like Zebra Technologies and Intel. European markets saw a volatile week, with the Stoxx Europe 600 falling initially but rallying mid-week, while Asian markets awaited central bank decisions, resulting in gains in South Korea but declines in Australia and Japan. In the Gulf region, stock markets had mixed performances amid rising oil prices and China's positive economic indicators. Nigeria's market declined, South Africa's JSE and Kenya's NSE ended lower, and bond markets saw significant movements tied to central bank actions and economic data. Central banks like the European Central Bank signaled the end of rate hikes, while the Bank of England was expected to raise rates, affecting yield movements and market sentiment. Rising bond yields and oil price increases posed challenges for the Federal Reserve. 

US Fed Chief Powell faces a crucial decision. High inflation persists alongside a robust labor market, necessitating a delicate balance. Aggressive monetary policies tamed inflation but recent spikes raise concerns. Rising interest rates could shift investor preferences to bonds, impacting stocks and emerging markets. A US recession appears less likely, and rate hikes may pause, contingent on inflation. Despite uncertainty, the stock market could thrive, buoyed by a strong US economy and tech sector growth. China grapples with financial turmoil as property giant Evergrande goes bankrupt, and Country Garden misses bond payments. The $2.9 trillion investment trust sector faces risks. JPMorgan predicts a 10% default in high-yield corporate debt, up from 4%. Foreign investments in China plunge 87% YoY, prompting government action. Oil prices, up 20% since June, influence inflation expectations. Recent declines provide relief. Treasury bond yields fall, but high mortgage rates, the highest since 2000, pose challenges, reducing home purchase applications. G-20 leaders gather in New Delhi, voicing apprehension over "cascading crises" and global economic uncertainty. Concerns align with IMF's warnings of the weakest global growth in decades, urging unity. Notably, Chinese and Russian leaders' absence underscores global tensions, while China engages with Zambia and Venezuela outside the G-20. US markets began the week on a cautious note following Labor Day as rising Treasury yields and oil prices cast doubt on a more dovish Federal Reserve. With a 93% chance of no September rate change but only a 54% likelihood of a November pause, uncertainty looms over central bank actions. Technology stocks faced pressure, and Apple grappled with Chinese iPhone restrictions. Strong jobless claims data raised concerns of prolonged tight monetary policy, causing weekly losses for the S&P 500 and Nasdaq after two weeks of gains. Oil hit a 10-month high at $91.25 due to OPEC+ supply cuts, raising worries of winter demand shortages. Bitcoin displayed mixed movements amid regulatory developments, closing at $25,899.7. Copper initially declined but rebounded on positive Chinese economic signals. Cocoa prices fluctuated due to supply issues, and dry US weather raised soybean supply concerns. Wheat prices surged on reduced rainfall in exporting nations, and sugar prices spiked due to a global deficit outlook. US yields initially rose but faced a sell-off, with the 2-year Treasury yield up 6 basis points and the 10-year yield climbing nearly 3 basis points. This followed strong economic data and an ISM Services index beat, sparking concerns about more rate hikes. Germany's 10-year bond yield ended slightly higher. Italy's 10-year government bond yield also inched up, with markets focused on potential ECB rate hikes and mixed signals from policymakers. Germany's economic outlook dimmed as industrial production fell more than anticipated in July.