Weekly Market Update (May 21, 2023)
Updated: May 21
S&P500 hit a new high on Thursday, mainly driven by mega-tech and semiconductor companies. Meanwhile, there are still concerns about Fed's potential rate hike in June. The volumes for mega-tech stocks call options went up 50% compared with the 20-day average. Kevin McCarthy, the House Speaker expected that the debt ceiling deal is likely to be done next week.
Choppy Pricing: Last week, the market was pricing a 5% likelihood of a rate hike in June. This week, it hit 40% and pullback to 25% recently. Markets are pricing in a 44bps rate cuts by the end of the year while it was 70bps last week. These changes are mainly due to Fed’s hawkish comments about additional rate hikes and inflation.
YCC: Investors are expecting the Bank of Japan will start to shift away from the yield curve control (YCC) in July. Japan’s GDP data came in on Wednesday, which is a strong one (1.6% actual vs 0.8% expected). Governor delivered a dovish speech afterward, stating that there will not be any move toward policy normalization in the near term.
China Rebound: Economic data in China showed the strength may not be sustainable after the post-pandemic rebound at the start of the year. However, its overall earnings outlook is still better than the US and Europe. China also continues to provide policy support, which is the opposite of the tightening policy in western countries.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Morgan Stanley: Although there is precedent for pause phrases to be positive to the stock markets, only 2 of 9 of such phrases can avoid further bear market lows. However, these two cases are different than today in terms of factors such as yield curve slope, inflation, labor market and lending conditions. Thus, the likelihood that a market downturn can be avoided is low.
UBS: High dividend and quality stocks are recommended in the recent environment. Historically, these stocks are resilient in a slow economy as dividend payments would still be stable even in a recession. Companies in this category usually have strong pricing power which allows them to shift the higher costs to customers. They will perform well against the backdrop of high inflation.
Goldman Sachs: US duration shorts are less attractive due to the bond selloff. As the optimism on the debt ceiling deal is increasing, the yield increases across the curve which is led by the front end. 2Y and 10Y treasury yield increased by 25bps and 17bps respectively.
Morgan Stanley: The issuance of treasury will explode once the debt ceiling agreement is reached. Constrained by the debt ceiling, the treasury issuance is near zero. We expect a tailwind to abate after the constraint is removed, draining the market liquidity from the system.
UBS: Recent economic data including the lower-than-expected GDP in Q1 indicated the weakness in the US economic growth. In addition, the tighter credit conditions are likely to weigh on corporate profits.
Barclays: Growth momentum is not shifting away from the US. While China’s economic data is disappointing and performance in the eurozone is uneven, the economy in the US is still resilient.
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