Current market commentary
Equities have celebrated hopes of a timely settlement in the US debt dispute. The S&P 500 is now trading well above its long-term average valuation level, with a P/E of 19x. The DAX marked a new all-time high last Friday, while Japanese equity indices reached their highest level since 1990. The bond and commodity markets, on the other hand, are much more sceptical. Many yield curves are inverted and 200bp of US rate cuts are priced in by the end of next year, while energy commodities and industrial metals have fallen sharply. The US dollar, as a safe haven, has recently even come close to recovering its YTD losses. On the surface, therefore, the equity markets are clearly more optimistic than other asset classes. Under the surface, however, cracks are appearing - cyclicals, small caps and value stocks have hardly participated in the rally, which was primarily driven by tech stocks and mega-caps. The exciting question remains: which market is right?
The markets are likely to focus on the negotiations on the US debt ceiling between Democrats and Republicans in the next two weeks. Central banks do not meet again until mid-June and the Q2 reporting season does not really start until mid-July. This Tuesday, the preliminary manufacturing and services purchasing managers' indices (S&P, May) are due for Europe and the US. On Wednesday, inflation data (April) for the UK and the ifo Business Climate Index (May) for Germany will follow. French business climate (May) follows on Thursday and on Friday US household income and spending (April) and US new orders (April) are released. The following week will see the ISM index (May) for the US, US consumer confidence (May), US labour market data (May), European inflation data (May) and German retail sales (April).
Who is right? Equity markets more optimistic than commodity markets
- The pain trade for cautious investors continued, with equities rising, driven by systematic strategies, short covering and hopes of a mild US recession.
- Industrial metals and oil, on the other hand, have fallen significantly. The Chinese recovery has been disappointing so far. Recession fears are also a burden. If the recession does not materialise, commodity markets should have significant catch-up potential. However, if there is a deeper recession, equity markets are unlikely to be immune and would have correction potential.