“Think NVIDIA looks dear? American shares could get pricier still:
Investors are willing to follow whichever narrative paints the rosiest picture”
Title of article from The Economist, June 19th 2024
SUMMARY
European equities bounced back last week although the upcoming elections in the UK (more or less fiat accompli with Labour far ahead) and France (Marine Le Pin’s RN party leading the polls) are garnering the most focus at the moment.
Stateside, US Treasury yields pushed higher across the curve, with most US stock indices registering gains although – breaking recent trends – the gains were best in the non-tech dominated equity indices. The NASDAQ was flat WoW even as the DJIA chalked up a +1.5% gain. Is the sizzle coming out of tech?
After briefly becoming the most valuable company in the world as of the close on Tuesday, NVDA shares weakened the remainder of the week, losing ground for the first time in many weeks (-4.0% WoW). Has the AI-fuelled rally reached its apex?
Headline CPI in the UK for May fell to 2.0% YoY, with core CPI declining to 3.5% YoY, both better than expected. Even so, the Bank of England held firm on the Bank Rate at its monetary policy meeting last Wednesday, although the stage seems set for a potential 25bps reduction in the Bank Rate at the next BoE meeting on August 1st.
Preliminary PMI manufacturing and services data for June in the Eurozone was worse than expected, with the UK faring slightly better. Preliminary PMI data in the US for June, released Friday, was better than expected. US jobless claims were more or less in line with forecasts, continuing to exhibit resiliency.
#Moody’s published a report“Growth in obesity drugs will affect multiple industries but impact will take years”last week, with an extract stating: “The rising use of GLP-1 drugs [i.e. weight-loss drugs including Wegovy (NVO) and Zepbound (LLY)] creates exposure for many sectors, including medical devices, food and beverage, restaurants, food packaging and health insurers.” You can read more about weight-loss drugs, along with LLY and NVO at theEMC website (here, here and here).
MARKETS LAST WEEK
Stock and bond markets were closed last Wednesday in the US for a federal holiday, but this didn’t stop stocks from continuing to largely roar forward. European equities recovered from their losses the prior week, and US Treasury yields inched higher.
Global equities: The FTSE 100 was the best performing global index tracked by EMC last week, with the STOXX 600 (Europe) also reversing recent losses. Stock markets in China and Japan were weaker WoW, with Chinese equities now on the verge of giving back all of their YtD gains.
US equities: In the US in a rare reversal of fortune, tech proved to be a drag on the (tech-dominated) indices last week, with the “mundane” DJIA posting the best gain (+1.5%) WoW. The S&P 500 also reached a record high – its 31st record high this year and the 11th week out of 12 that the index has risen – before falling back to close the week off its highs but still registering a gain of 0.6% for the week.
US Treasuries: Yields rose across the curve in the US Treasury bond market, with US PMI data solid and first time jobless claims changing little WoW. Total returns across the curve remain negative YtD.
The table below illustrates the performance in other assets tracked by EMC. Note that the Yen is bumping up against the ¥160/US$1.00 threshold again, a level that is thought to encourage intervention by the Bank of Japan. The US Dollar continues exhibit resiliency, with risk around UK and Eurozone elections weighing on the Euro ($1.0697/€1.00) and Sterling ($1.2645/£1.00).
Corporate credit was little changed on the week, although high yield spreads narrowed slightly in both the USD- and EUR-denominated high yield bond markets.
WHAT MATTERED LAST WEEK
UK CPI (headline) for May fell to its lowest level since July 2021, coming in at 2.0% YoY / 0.3% MoM. Core CPI fell to 3.5% YoY / 0.5% MoM. Similar to the US and Eurozone, the driver of core CPI in the UK continues to be services (+5.7% YoY / +0.6% MoM), while CPI for goods continues to trend lower (-0.8% YoY / 0% MoM). The view from economists is that although the decline in inflation is good news, services inflation in particular is too elevated to suggest an obvious pivot by the BoE. For details regarding the CPI data, see the ONS release “Consumer Price Inflation, UK: May 2024”.
As expected, the Bank of England held firm as far as its monetary policy on Wednesday, keeping the Bank Rate at 5.25% (BoE summary and minutes here). However, investors increased their bets that the BoE might reduce the Bank Rate by 25bps at the next MPC meeting on August 1st. Central bank policy is diverging in different countries. The Swiss National Bank lowered its policy rate 25bps on Thursday (to 1.25%), while the Norges Bank kept its policy rate unchanged at 4.50%, concurrently signalling that there might be no reduction in the policy rate in Norway this year.
There is increasing focus in the coming two weeks on snap elections in the UK (July 4th) and France (two rounds, June 30th and July 7th). The election in UK looks like a fait
accompli, with Labour leading by a wide margin in all polls as you can see in the graph on the right from #Bloomberg. Should Labour win as expected, it would be the first time since 2010 that the Conservatives have not led the UK government.
Markets have been fairly relaxed so far although Labour seems set to increase government revenues through a series of proposed tax increases, including higher taxes on private equity professionals and by taxing private school fees. Current PM Rishi Sunak has already proposed ending the favourable non-dom status, a policy on which Labour is also supportive. I view Labour’s tax policies as just one more reason in a series, starting with the BREXIT referendum, that is causing high net worth individuals to leave the UK. The press suggests that it might appear principally to be foreigners leaving the country for “friendlier tax regimes” elsewhere, but I believe that there are a fair number of Brits also re-assessing the UK as a home base, unhappy with the direction of travel of UK taxes that is ahead once Labour takes the helm. These steady departures erode the tax base, which fiscally speaking is equivalent to death by a thousand cuts, far from ideal at the moment.
More concerning to investors is the parliamentary election in France, where Marine Le Pin’s Rassemblement National (“RN”) party is leading the polls. The RN is considered a far right party due to its focus on tax reduction and anti-immigration policies. With the expectation of an increasing deficit should the RN take control, French bond yields have widened sharply since President Macron called for a snap election. The French stock market has been under stress.
The graph to the left from #Bloomberg shows the spread difference between the 10y French OAT and the 10y German Bund, illustrating how the cost of borrowing by the French government has increased since Mr Macron called the snap election on June 12th following the surprising outcome of the European Parliamentary elections. With the yield of the 10y OAT closing 80bps higher than the yield of the 10y Bund on Friday, French government bond spreads are now at their widest differential since the Euro crisis in 2012. The increase in French borrowing costs due to deficit concerns and political uncertainty highlights the difference between nearly every country in the world and the US, with investors able to punish other countries for fiscal mismanagement while the US gets by with the equivalent of fiscal murder as US deficits spiral.
Although it was short-lived, Nvidia (NVDA) became the most valuable company in the world last Tuesday, passing Apple and Microsoft, reaching a market capitalisation in excess of $3.3 trillion. NVDA’s stock has increased 156% this year, and 194% in the past 12 months, powering forward on the surge of interest and growth opportunities coming from AI. In fact, an interesting graph from Bloomberg on Thursday illustrated with NVDA heading one direction and the French stock market heading the other, NVDA is now worth more than the entire French stock market!
MY TRADES LAST WEEK
I closed out my final call on AAPL (covered call, strike 190), and added scraps of AAPL and ASML (both arguably well above full value, which is why I am being cautious).
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