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Weekly Market Update (April 02, 2023)



HIGHLIGHTS

US stocks increase after the last FOMC meeting as the market is expecting an imminent end of hiking cycle. S&P500 was up this week, with Energy sector as the best performer and Communication Services sector as the worst performer. 13bps hike is priced in for May meeting and 47bps cuts are priced in for the end of the year.

Banks: Bank stocks rallied about 4% this week after First Citizens Bank bought out Silicon Valley Bank. Additional regulations for capital requirements and liquidity metrics are expected after the recent banking system stress. Banks will likely reduce lending in the coming future due to higher funding costs. It will be headwinds for economic growth.


Money Markets: Inflows to money markets are still rising but at a slower pace. It has recorded the highest quarterly inflows since the beginning of the pandemic. The first quarter closed with $508 billion of inflows. Most of the inflows are contributed by the recent movements - 62 billion, 108 and 115 billion over the previous three weeks.

China Tech: Alibaba announced its breakup plan of splitting into six units, which will raise funds and potentially explore IPO separately. Stock price of Alibaba jumped by 16% following the announcement. Tencent’s price also increased as investors are anticipating a similar restructuring on them. Markets are expecting a higher valuation when the divisions can be listed and traded separately.

 
MARKETS

Nasdaq

12,221.91

+3.37%

S&P 500

4,109.31

+3.48%

Dow

33,274.15

+3.22%

10-Year

3.49%

+11bps

Brent

79.77

+6.39%

DXY

102.51

-0.58%

*Data as of market close. 5-day change ending on Friday.

 
VIEW FROM THE STREET

Equity

Goldman Sachs: In terms of the returns at the end of hiking cycle by sector, Financials outperform S&P500 in 5 of 6 cycles while Materials performed the worst. Other than that, stocks with weak balance sheet usually perform better than strong ones in 4 of 5 cycles. Value stocks also outperform the market frequently at the end of the cycle.


Morgan Stanley: Recessions and stagflation risks have increased significantly but are not discounted in the consensus of earnings forecast or valuation multiples.

Fixed Income

Goldman Sachs: US 10Y nominal treasury yield usually dropped at the end of hiking cycle. However, Fed will likely cut less if a soft landing is achieved. In contrast, if the economic growth is weak, equity risk premium will be higher resulting in lower equity multiples even when the interest rate is dropping.


J.P. Morgan: Bonds could provide attractive returns and capital appreciation when Fed cuts rates. Fed could do policy easing when the economic outlook worsens, which provides support to the financial markets.


Economy

Goldman Sachs: Market is pricing 50% odd of a 25bps hike in May and cuts in the following meetings. The recent hiking cycle is the steepest among the 6 other hiking cycles. Historically, hiking cycle lasted for 20 months and 292bps increase on average, while the current one lasted for 12 months and 475bps increase. Equities usually rallied when the Fed policy pivoted.


Morgan Stanley: Investors are interpreting the concerns about stability and potential remedial actions as the signal of sooner-than-expected rate pause or cut. The likelihood of recession has also increased as tighter lending conditions will weaken GDP and employment.

 
KNOWLEDGE TRANSFER

Spirit & JetBlue Merger

Here's all you need to know about the major airline merger deal.


Elon Musk's Twitter

Here's all you need to know about the $44b Twitter deal.


London Metal Exchange

Here's all you need to know about the LME´s nickel lawsuit.


LUNA

Confused about what happened to UST and LUNA? Here's all you need to know about the event!


 
DISCLOSURE

This newsletter is meant for informational purposes only and is not investment advice. Always consult a licensed investment professional before making important investment decisions. Advertising and sponsorship do not influence editorial content or decisions. Market Hedwig is not responsible for the promises made or the quality or reliability of the products or services offered in any advertisement.



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