Comment of the Day
1st August 2023
Eoin Treacy
Aug 2
Video commentary for August 1st 2023
A link to today's video commentary is posted in the Subscriber's Area.
Strategists Scramble to Catch Up as S&P 500 Rally Rumbles On
This article from Bloomberg may be of interest. Here is a section:
There’s a shift in tone happening across Wall Street.
Oppenheimer Asset Management’s Chief Investment Strategist John Stoltzfus lifted his target on the S&P 500 index to a Street high, a day after Morgan Stanley (NYSE:MS)’s Michael Wilson, one of the market’s leading doomsayers, sounded less bearish than usual.
Stoltzfus now sees the S&P 500 index hitting 4,900 by the end of the year, leaving room for another 7% gain. The target would mark a new record for the gauge, and one that plays out against bearish predictions by bigwigs such as Wilson, JPMorgan Chase & Co (NYSE:JPM).’s Marko Kolanovic and Bank of America Corp (NYSE:BAC).’s Michael Hartnett. They were all blindsided by the resilience of the US economy and the sudden emergence of the artificial intelligence-driven tech rally.
US equities have soared this year as investors looked past the earnings recession, growing confident that the economy would avoid any serious slowdown while anticipating less hawkish monetary policy. Even so, the most recent median forecast among Wall Street strategists tracked by Bloomberg still showed a decline for the index by year-end.
Eoin Treacy's view
The time to be most cautious is when all of the bears throw in the towel and become bullish. That suggests the available cash on the sidelines, waiting for a pullback has given up, and conceded now is the time to take big bets.
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UK House Price Declines Deepen as Borrowing Costs Cut Demand
This article from Bloomberg may be of interest to subscribers. Here is a section:
British home prices fell further last month as borrowing costs held back demand, one of the largest mortgage lenders said, although the rate of decline showed a chance that the market could yet avoid a hard landing.
The Nationwide Building Society said prices fell 3.8% in its July survey from a year ago, quicker than a 3.5% drop in the previous month. While economists expected a slightly larger decline of 4%, it was the third straight month that prices had fallen at their fastest pace since the global financial crisis in 2009.
The first hard data about July home prices indicate the 13 interest-rate increases from the Bank of England since the end of 2021 have strained consumer’s ability to pay for properties. Values based on Nationwide’s data have fallen about 4.5% since they peaked in August and now average £260,828 ($334,000).
Still, prices have so far avoided the collapse that appeared possible last autumn, when then-Prime Minister Liz Truss’s ill-fated budget sent borrowing costs soaring to 14-year highs. In November, Nationwide warned of a potential 30% drop in prices in a worst-case scenario.
Eoin Treacy's view
It is well understood that quantitative easing causes asset price inflation. Over the last 15 years, artificially low rates and abundant credit supported concurrent bull markets in bonds, equities, property, crypto and collectibles. It is logical to then conclude that quantitative tightening and higher rates results in asset price disinflation/deflation.
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Chile fires the starting gun on EM easing cycle
This article from Schroders may be of interest. Here is a section:
The decision by policymakers to cut rates by a consensus-busting 100bp to 10.25% on Friday made Chile the first major EM to lower its key policy rate since the aggressive post-pandemic tightening cycle across the emerging world. With the economy struggling, a marked improvement in the outlook for inflation encouraged policymakers to get on with the job of reversing past hikes that saw Chile’s policy rate climb from just 0.5% in mid-2021 to a peak of 11.25% in late-2022.
As we noted earlier this year, further steep declines in inflation, led by food, should make space for additional easing in the months ahead.
Who’s next?
Attention now turns to which EM central banks are likely to be the next to start cutting rates. Prior to lowering rates on Friday, the CBC was one of a handful of EM central banks that had already been on pause for longer than usual. Others in that category include Brazil and the Czech Republic, where monetary policy announcements are due this week on Wednesday and Thursday respectively.
Eoin Treacy's view
Brazil’s central bank is expected to cut by at least 0.25% tomorrow. With a positive real rate in excess of 10% they have ample room to cut rates to support flagging economic activity.
Since several Latin American countries were both early and aggressive in their efforts to tame inflation. The trajectory of their policy offers a picture of what we can expect from countries that were slower to act.
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Eoin's personal portfolio: two investment positions opened
One of the questions subscribers ask most often is how to find details of my open trades. To make it easier I will simply repost the latest summary on a daily basis until there is a change.
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© 2023 Eoin Treacy
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