Economic Data Watch and Market Outlook
Equities continued their advance this past week as the MSCI World and S&P 500 rose 1.30% and 1.07% respectively. Big tech has continued to carry global markets, especially the S&P 500, and investors will be focused on the upcoming earnings releases from Alphabet, Amazon, Apple, Meta and Microsoft. According to Factset, six of the seven of the “Magnificent Seven”, are expected to have a combined earnings growth rate of 53.7% year-over-year. The remaining 494 companies are expected to report year-over-year growth of NEGATIVE 10.5%. The seventh Magnificent Seven stock, Tesla, released earnings this past Thursday that missed expectations and the stock fell 12% after the release.
Roughly 25% of the names in the S&P 500 have reported fourth quarter earnings with 69% beating expectations with tech and consumer staples having the largest percentage of companies reporting a positive earnings surprise.
In 2023, the US outpaced China in economic growth, with a 6.3% rise in GDP compared to China’s 4.6%. This growth was unexpected, as the US rebounded strongly from the pandemic while China faced numerous challenges such as a real estate downturn and deflation. Doubts about the accuracy of China’s reported growth and debates over measuring economic size have shifted perspectives, with nominal GDP favoring the US. Asset flows were a good indicator of this data from June to November 2023 as investors added to emerging markets but choosing ex-China options.
The second largest emerging market, India, is gearing up for general elections in held April through May. According to the Morning Consult’s weekly poll, Modi has the highest approval rating (77%) of leaders globally, noting that China, Russia, and other authoritarian countries were not included.
December home sales data was released on Friday and was significantly above expectations, up 8.3% versus a 2.0% estimate. It’s the largest increase since June of 2020.
Personal income and personal spending continues to increase. Data reported for December released on Friday shows that personal income increased 0.3% month-over-month slightly below the estimate of 0.4% while personal spending came in above estimates, 0.7% versus and estimate of 0.5%.
Shipping delays continue to occur in the Red Sea with little end in sight. As we’ve noted in the past, this has put pressure on the timing of the delivery of goods and has impacted prices. According to an Arbor Data Science, since November, shipping container rates have surged 122%. This past week they rose $705 to a current rate of $3,777.
Equities
Major equity indices finished higher for the third consecutive week and the 12th time in13 weeks. Big cap technology names saw gains and elevated the S&P 500 to a five-day win streak before snapping it on Friday. For the week the Dow Jones Industrial Average rose 0.65%, the S&P 500 rose 1.07%, and the Nasdaq rose 0.94%. Major movers included Tesla which declined sharply after the company missed earnings and revenue estimates and echoed a slower growth outlook for 2024. Netflix recorded solid gains after a surprising growth in subscribers. Large value names outperformed Growth names for the week and the Russell 1000 Value advanced 1.24% versus the Russell 1000 Growth rising 88 basis points. Gains in value stock for the week brought them into positive territory on a year-to-date basis but are still behind growth names (R1000 Value +41 basis points versus R1000 Growth +3.98%). The Russell 2000 Index snapped a four-week losing streak rising 1.75%. Similar to large caps, small value names slightly outperformed small growth names (R2000 Value +1.93% vs R2000 Growth +1.57%).
From a sector perspective, energy was the best performing sector as crude oil rose to the highest level since the end of November. Energy was followed by communication services and financials. Communication services and technology hit record highs but closed the week lower. Consumer discretionary and real estate lagged the broader market.
Globally equities were positive and emerging markets outperformed developed markets as China reversed some losses this week and investors poured nearly $12 billion into Chinese equity funds. This is the largest inflow since 2015 and the second largest ever per a Bank of America Global research report Friday. In Europe, the Euro STOXX 600 Index closed the week 3.11% higher as investors received encouraging corporate results and China’s announcement of additional stimulus measures. Stocks also reacted to the European Central Bank’s move to leave interest rates unchanged and signaled a more dovish outlook. Most major indices in Europe rose with Germany’s DAX rising 2.45%, the UK’s FTSE 100 Index gaining 2.32%, France’s CAC 40 Index jumping 3.56%, and Italy’s FTSE MIB rising 0.32%. In Asia, Japanese equities declined during the week as the Nikkei 225 Index and the broader TOPIX both declined nearly half a percent. The Bank of Japan retained its stance including forward guidance and Governor Kazuo Ueda highlighted the Central Bank’s progress towards sustained inflation. Chinese equities rose after Beijing stepped in to support the economy. The Shanghai Composite Index rose 2.75% and the blue-chip CSI 300 gained 1.96%. In Hong Kong, the Hang Seng Index rose 4.2%.
Fixed Income
Treasury yields were split this week with yields on the shorter end of the curve finishing lower while longer term yields ended higher for the second straight week. The 2-year Treasury yield fell 5 bps to 4.34% while the 10-year Treasury yield remained unchanged at 4.15% from a week ago and the 30-year Treasury yield climbed 2 bps to 4.38%. Meanwhile, the Bloomberg US Aggregate Bond Index rose +0.10%, the Bloomberg US Corporate High Yield Index rose +0.61%, and the Bloomberg US MBS Index climbed 0.09%. This week’s key market drivers were the PCE price index, which rose only 0.2% in December and was in line with economists’ expectations. Furthermore, data released Friday showed pending home sales jumped by the largest amount since June 2020. Interest-rate expectations remained relatively unchanged with Fed Funds futures showing a 97.4% chance of a continued pause in rate decisions at next week’s Fed meeting.
Over the next three months, the US Treasury Department is projected to issue some of the largest auctions that investors have ever seen. Currently the sizes of the monthly two and five year note auctions are at peak levels – with Tuesday and Wednesday seeing $60B of two-year notes, and $61B of five-year notes auctioned off. In November 2023, Treasury officials announced they anticipate that one additional quarter of coupon sizes would likely be needed, suggesting that two and five-year sales will break new levels in 2024. If this is the case, the April five-year auction is expected to be around $70B, 63% higher than a year earlier.
Early in the week, the US dollar rallied significantly, marking its biggest advance in 10 months, with the Bloomberg Dollar Spot Index climbing 0.8%. This surge defied predictions of a dollar decline, anticipating the Federal Reserve’s monetary policy easing. Heightened by geopolitical tensions and China’s economic fragility, the dollar’s ascent reflects traders’ overestimation of Fed rate cuts. Central banks, like the ECB, maintain a cautious stance on reducing rates due to inflation and geopolitical risks, reinforcing a stronger dollar outlook.
Junk-rated emerging market borrowers have seen a massive influx of cash so far this year with investment-grade issuers such as Chile, Mexico, and Hungary being extremely active in the last several weeks. So far developing economies have issued $64B of debt this year which is just below the $66B in the same period last year. Expectations for volatility later in the year due to Fed decisions and the US election are creating some urgency to lock in rates.
Private credit has been an attractive area for investors over the last several years as rates have risen. Now, as the prospect of a falling rate environment becomes more prevalent, private credit lenders are taking steps to be even more appealing in the new interest rate landscape. Direct lenders are looking to finance larger deals as well as extending their range of products in order to attract new customers. DB, a private capital investment firm spun off by Deutsch Bank is expanding its line of products for businesses by offering net-asset-value financing, an increasingly popular option in private equity that allows investors to borrow against their assets within the fund. Private credit has taken a dominant position in European lending over the last 10 years, according to Nael Khatoun, managing director at Oaktree Capital Management, “10 years ago, Europe was 80% bank-led, 20% alternative lender, and that’s reversed itself”.
Hedge Funds as of thursday, January 25th
For the week ending Thursday, January 25th, the average global hedge fund (HF) posted gains of ~60 bps vs. the MSCI World’s return of +1.2% while the average Americas-based long/short equity (L/S) fund gained ~90 bps vs. the S&P 500’s +1.1%. The top 50 crowded longs and shorts benefited HF returns and likely contributed to the stronger performance vs. the S&P, as the top 50 longs in North America (NA) were +20 bps more than the S&P while shorts lagged by ~60 bps. For the year, the average global fund is now +0.6% and the average Americas-based L/S fund is +1.3%. EU-based HFs returned ~30 bps for the week leaving them up +20 bps YTD (vs. Euro STOXX 600 flat) while Asia-based HFs posted gains just north of 1% WTD, leaving them flat for the year (vs. MSCI Asia Pacific -1.7%).
HFs flipped to buying global equities this week as benchmark indices continued to rally, though there was a clear shift in focus towards regions other than NA, with Asia ex-Japan, Japan, and Europe all net bought. Asia ex-Japan was ultimately the most net bought region with China accounting for most of the activity (there was also buying across broader emerging markets Asia). Flows to China had been skewed towards net selling for the better part of the past ~8 months, but this past week ranked as the 2nd largest in terms of net buying seen since July 2023. Most of the net buying in China can be attributed to HFs buying H-shares, though it is worth noting that HFs also added to ADR longs as well. Options have been a preferred way to gain China upside exposure as of late, with call options across various China-linked products spiking to the 99th percentile since 2018 and the buying from the 23rd to the 25th the largest trailing 3-days in more than five years(long buying). In Japan, the buying was a mix of long additions and short covers to a lesser extent. At the sector level, most Japan sectors skewed towards being net bought with TMT-related industries ultimately leading the activity. The positioning setup in China still leans quite bearish as net exposure across most share-types sits at or near ~5+ year lows, whereas net exposure to Japan has recently increased to multi-year highs.
In Europe, similar to both AxJ and Japan, the buying was split between a mix of long adds and short covers. Consumer discretionary saw the largest amount of long additions as HFs added exposure within the luxury goods space. Tech also saw small long additions, but it was the short covering within the sector that led to it being the most net bought for the week, with covers split between software and semiconductor names. As for NA, HF flows indicated that funds were net buyers of the region, but HFs were reducing gross exposure to the region on both the long and short side. Healthcare was the most net bought single-name sector as HFs added to longs/covered shorts across most sub-sectors, led by healthcare providers & services (long adds) and healthcare equipment & supplies (covers). Consumer discretionary has been sold the past five of six weeks. ETFs also contributed to the overall net buy skew due to HFs covering shorts in index-related products. TMT-related industries offset much of the buying in other single-name sectors as HFs trimmed long exposure to mega-cap TMT names, with this week being one of the larger weeks in terms of long selling observed in recent months. The selling of the space led to HFs being net sellers of size, growth, and quality.
Authors:
Jon Chesshire, Managing Director, Head of Research
Elisa Mailman, Managing Director, Head of Alternatives
Michael McNamara, Analyst
Sam Morris, Analyst
Data Source: Apollo, Barron’s, Bloomberg, BBC, Charles Schwab, CNBC, the Daily Shot HFR (returns have a two-day lag), Goldman Sachs, Jim Bianco Research, J.P. Morgan, Market Watch, Morningstar, Morgan Stanley. Pitchbook, Standard & Poor’s and the Wall Street Journal.
Equities
Major equity indices finished higher for the third consecutive week and the 12th time in13 weeks. Big cap technology names saw gains and elevated the S&P 500 to a five-day win streak before snapping it on Friday. For the week the Dow Jones Industrial Average rose 0.65%, the S&P 500 rose 1.07%, and the Nasdaq rose 0.94%. Major movers included Tesla which declined sharply after the company missed earnings and revenue estimates and echoed a slower growth outlook for 2024. Netflix recorded solid gains after a surprising growth in subscribers. Large value names outperformed Growth names for the week and the Russell 1000 Value advanced 1.24% versus the Russell 1000 Growth rising 88 basis points. Gains in value stock for the week brought them into positive territory on a year-to-date basis but are still behind growth names (R1000 Value +41 basis points versus R1000 Growth +3.98%). The Russell 2000 Index snapped a four-week losing streak rising 1.75%. Similar to large caps, small value names slightly outperformed small growth names (R2000 Value +1.93% vs R2000 Growth +1.57%).
From a sector perspective, energy was the best performing sector as crude oil rose to the highest level since the end of November. Energy was followed by communication services and financials. Communication services and technology hit record highs but closed the week lower. Consumer discretionary and real estate lagged the broader market.
Globally equities were positive and emerging markets outperformed developed markets as China reversed some losses this week and investors poured nearly $12 billion into Chinese equity funds. This is the largest inflow since 2015 and the second largest ever per a Bank of America Global research report Friday. In Europe, the Euro STOXX 600 Index closed the week 3.11% higher as investors received encouraging corporate results and China’s announcement of additional stimulus measures. Stocks also reacted to the European Central Bank’s move to leave interest rates unchanged and signaled a more dovish outlook. Most major indices in Europe rose with Germany’s DAX rising 2.45%, the UK’s FTSE 100 Index gaining 2.32%, France’s CAC 40 Index jumping 3.56%, and Italy’s FTSE MIB rising 0.32%. In Asia, Japanese equities declined during the week as the Nikkei 225 Index and the broader TOPIX both declined nearly half a percent. The Bank of Japan retained its stance including forward guidance and Governor Kazuo Ueda highlighted the Central Bank’s progress towards sustained inflation. Chinese equities rose after Beijing stepped in to support the economy. The Shanghai Composite Index rose 2.75% and the blue-chip CSI 300 gained 1.96%. In Hong Kong, the Hang Seng Index rose 4.2%.
Fixed Income
Treasury yields were split this week with yields on the shorter end of the curve finishing lower while longer term yields ended higher for the second straight week. The 2-year Treasury yield fell 5 bps to 4.34% while the 10-year Treasury yield remained unchanged at 4.15% from a week ago and the 30-year Treasury yield climbed 2 bps to 4.38%. Meanwhile, the Bloomberg US Aggregate Bond Index rose +0.10%, the Bloomberg US Corporate High Yield Index rose +0.61%, and the Bloomberg US MBS Index climbed 0.09%. This week’s key market drivers were the PCE price index, which rose only 0.2% in December and was in line with economists’ expectations. Furthermore, data released Friday showed pending home sales jumped by the largest amount since June 2020. Interest-rate expectations remained relatively unchanged with Fed Funds futures showing a 97.4% chance of a continued pause in rate decisions at next week’s Fed meeting.
Over the next three months, the US Treasury Department is projected to issue some of the largest auctions that investors have ever seen. Currently the sizes of the monthly two and five year note auctions are at peak levels – with Tuesday and Wednesday seeing $60B of two-year notes, and $61B of five-year notes auctioned off. In November 2023, Treasury officials announced they anticipate that one additional quarter of coupon sizes would likely be needed, suggesting that two and five-year sales will break new levels in 2024. If this is the case, the April five-year auction is expected to be around $70B, 63% higher than a year earlier.
Early in the week, the US dollar rallied significantly, marking its biggest advance in 10 months, with the Bloomberg Dollar Spot Index climbing 0.8%. This surge defied predictions of a dollar decline, anticipating the Federal Reserve’s monetary policy easing. Heightened by geopolitical tensions and China’s economic fragility, the dollar’s ascent reflects traders’ overestimation of Fed rate cuts. Central banks, like the ECB, maintain a cautious stance on reducing rates due to inflation and geopolitical risks, reinforcing a stronger dollar outlook.
Junk-rated emerging market borrowers have seen a massive influx of cash so far this year with investment-grade issuers such as Chile, Mexico, and Hungary being extremely active in the last several weeks. So far developing economies have issued $64B of debt this year which is just below the $66B in the same period last year. Expectations for volatility later in the year due to Fed decisions and the US election are creating some urgency to lock in rates.
Private credit has been an attractive area for investors over the last several years as rates have risen. Now, as the prospect of a falling rate environment becomes more prevalent, private credit lenders are taking steps to be even more appealing in the new interest rate landscape. Direct lenders are looking to finance larger deals as well as extending their range of products in order to attract new customers. DB, a private capital investment firm spun off by Deutsch Bank is expanding its line of products for businesses by offering net-asset-value financing, an increasingly popular option in private equity that allows investors to borrow against their assets within the fund. Private credit has taken a dominant position in European lending over the last 10 years, according to Nael Khatoun, managing director at Oaktree Capital Management, “10 years ago, Europe was 80% bank-led, 20% alternative lender, and that’s reversed itself”.
Hedge Funds as of thursday, January 25th
For the week ending Thursday, January 25th, the average global hedge fund (HF) posted gains of ~60 bps vs. the MSCI World’s return of +1.2% while the average Americas-based long/short equity (L/S) fund gained ~90 bps vs. the S&P 500’s +1.1%. The top 50 crowded longs and shorts benefited HF returns and likely contributed to the stronger performance vs. the S&P, as the top 50 longs in North America (NA) were +20 bps more than the S&P while shorts lagged by ~60 bps. For the year, the average global fund is now +0.6% and the average Americas-based L/S fund is +1.3%. EU-based HFs returned ~30 bps for the week leaving them up +20 bps YTD (vs. Euro STOXX 600 flat) while Asia-based HFs posted gains just north of 1% WTD, leaving them flat for the year (vs. MSCI Asia Pacific -1.7%).
HFs flipped to buying global equities this week as benchmark indices continued to rally, though there was a clear shift in focus towards regions other than NA, with Asia ex-Japan, Japan, and Europe all net bought. Asia ex-Japan was ultimately the most net bought region with China accounting for most of the activity (there was also buying across broader emerging markets Asia). Flows to China had been skewed towards net selling for the better part of the past ~8 months, but this past week ranked as the 2nd largest in terms of net buying seen since July 2023. Most of the net buying in China can be attributed to HFs buying H-shares, though it is worth noting that HFs also added to ADR longs as well. Options have been a preferred way to gain China upside exposure as of late, with call options across various China-linked products spiking to the 99th percentile since 2018 and the buying from the 23rd to the 25th the largest trailing 3-days in more than five years(long buying). In Japan, the buying was a mix of long additions and short covers to a lesser extent. At the sector level, most Japan sectors skewed towards being net bought with TMT-related industries ultimately leading the activity. The positioning setup in China still leans quite bearish as net exposure across most share-types sits at or near ~5+ year lows, whereas net exposure to Japan has recently increased to multi-year highs.
In Europe, similar to both AxJ and Japan, the buying was split between a mix of long adds and short covers. Consumer discretionary saw the largest amount of long additions as HFs added exposure within the luxury goods space. Tech also saw small long additions, but it was the short covering within the sector that led to it being the most net bought for the week, with covers split between software and semiconductor names. As for NA, HF flows indicated that funds were net buyers of the region, but HFs were reducing gross exposure to the region on both the long and short side. Healthcare was the most net bought single-name sector as HFs added to longs/covered shorts across most sub-sectors, led by healthcare providers & services (long adds) and healthcare equipment & supplies (covers). Consumer discretionary has been sold the past five of six weeks. ETFs also contributed to the overall net buy skew due to HFs covering shorts in index-related products. TMT-related industries offset much of the buying in other single-name sectors as HFs trimmed long exposure to mega-cap TMT names, with this week being one of the larger weeks in terms of long selling observed in recent months. The selling of the space led to HFs being net sellers of size, growth, and quality.
Authors:
Jon Chesshire, Managing Director, Head of Research
Elisa Mailman, Managing Director, Head of Alternatives
Michael McNamara, Analyst
Sam Morris, Analyst
Data Source: Apollo, Barron’s, Bloomberg, BBC, Charles Schwab, CNBC, the Daily Shot HFR (returns have a two-day lag), Goldman Sachs, Jim Bianco Research, J.P. Morgan, Market Watch, Morningstar, Morgan Stanley. Pitchbook, Standard & Poor’s and the Wall Street Journal.