US equity contracts continue to fall as markets reduce the likelihood of the highly optimistic scenario that central bankers will cut interest rates in time to avert a recession. Wall Street is trading significantly lower in pre-market US trading, pointing to a possible second day of losses for the S&P 500 after the benchmark index rose to its highest level since March 2022 last week on expectations that the Federal Reserve will ease monetary policy soon. The losses come even though yields have fallen – which is a signal, as it was last week, that US equities are expensively priced.
Investors started December with optimism, believing the epic November rally will continue. Analysts also broadly expected the rally to continue until before Christmas and are now shocked at how quickly the narrative has seemingly changed to what we predicted – with near perfect timing.
The rally in November was based on the hope that central banks around the world would move to looser monetary policy after inflation cooled, while the US economy in particular would be able to avoid a sharp recession (the so-called “soft landing”). This perfect “Goldilocks” scenario is difficult to achieve and the likelihood of disappointment is high, while there is little room for more optimism.
Swap markets are still anticipating sharp rate cuts by the Fed in H1/2024, including a 50% chance of the first cut in March. I continue to disagree with the market here and believe there will be an awakening for the market and analysts in the coming days and expectations will move towards our forecast.
Much will depend on the resilience of the US labor market. While I expect a slowdown, it will not be enough for the Fed to cut rates anytime soon. Even if the market misjudges the upcoming labor market data, it will likely come to the same conclusion (unless we see a very sharp weakening in the US labor market, including a sharp drop in job openings reported later today).
We see further weakness in the EUR following the dovish comments from ECB officials. Again, it seems that markets are following our view that rate cuts in the Eurozone are actually closer than in the US.
Mainland China and Hong Kong stocks slumped after Moody's Investors Service cut the outlook on the country's sovereign debt to negative. The MSCI China Index slid as much as 2.3% to its lowest level since November 2022 – in stark contrast to markets in Europe and the US, which are near their 2023 highs and mostly overbought.
It is remarkable that all markets are doing exactly what we have been predicting over the last few days/weeks (contrary to majority and analyst opinion – congratulations!).
To the surprise of oil traders (and OPEC), the oil price continues to fall as we predicted. Gold will benefit from falling yields for the time being. Bitcoin has also maintained its recent gains and continues to trade near $42K.
I expect a continued rotation from growth to value/defensive stocks in the equity market.
👁 ROB'S MARKET OVERVIEW:
December 05, 2023
🌐/🇺🇸 Global/US Markets ↘️/↕️
Cyclical Stocks ↘️/➡️
Tech/Growth Stocks ↘️
Financial Stocks ➡️/↘️
Defensive Stocks ➡️/↗️
Energy Stocks ➡️/↘️
Materials Stocks ↘️
EUR ➡️/↘️ (following dovish ECB comments)
⚡️Cryptos ➡️ (sideways for now – range $41K – $42K; overall slightly bullish)
(*↗️ bullish, ↘️ bearish, ➡️ sideways / stable, ↕️ mixed / volatile)