Nasdaq outperformed S&P500 this week, mainly driven by the bullish sentiments toward semiconductors and generative AI. Markets are pricing 25bps of hikes in the coming meetings due to the firm economic data and hawkish comments from Fed officials.
Firm Data: US data this week showed persistent inflation while the economic growth and labor market strength continued. GDP and core Personal Consumption Expenditure (PCE) came in higher than expected while jobless claims dropped further. Markets are pricing higher peak rates now to 5.33%.
Commercial Real Estate: A basket of companies with commercial real estate exposure dropped 2% this week. The decline is mainly driven by the higher interest rate and vacancies. The sector is down by 12% since the start of the year.
Eurozone: It is not over yet. Germany is in a technical recession with negative GDP in 2 consecutive quarters (4Q22 & 1Q23). Markets are pricing 50bps of additional hikes by the ECB. The headline CPI in the UK came in higher than expected (8.7% actual vs 8.2% expected). The likelihood of more rate hikes by the BoE has increased.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Morgan Stanley: The concentration of the 10 largest stocks in the US is causing extreme valuation divergence as big names are more expensive while the small names become even cheaper. Risks are amplified as the global portfolios also overweight US stocks. We recommend small-cap, cyclical and value stocks, and favor emerging markets due to the tactical rebalancing in the next 6-12 months.
UBS: After the tech rally, we see risks around the industries. However, we can watch out for the defensive parts of the sector such as the internet and software.
Goldman Sachs: Flows into fixed income funds are stronger than equities (+9bn vs +4bn). Quality carry in sovereign credit is recommended, especially in the markets with high yield and low sensitivity to global risks, such as Philippines, Indonesia, South Africa, etc.
UBS: Cash and short-duration bills are more attractive recently as the 3M treasury yield jumped to a 20-year high this week. However, it may be short-lived when the agreement on the debt ceiling is done. 1M treasury yield was dropping due to the moderating default risks already.
J.P. Morgan: Economic data in China missed expectation. Although PBoC’s liquidity easing can boost confidence, fiscal policies are also important to ensure the long-term growth of China's economy.
Standard Chartered: We expect Asia countries to drive global growth this year as the US is likely to enter a mild recession by Q4 and the growth in the eurozone is going to slow down due to the tighter monetary policies. In contrast, China policymakers are providing stimulus to sustain the economic recovery including domestic consumption, private investment, labor market and housing sector.
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