Weekly Analyst Update — May 9

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Winners and losers from rampaging USD

The US dollar has soared to 20-year highs this year as a ‘safer haven’ and with the hawkish Fed pivot, breaking key levels vs EUR, GBP, JPY. Have likely seen most of the US dollar strength, but any reversal will be slow. The strong dollar hurts emerging markets (EEM), commodities (DJP), and US tech (XLK) and exports, whilst is a support ‘buffer’ for Europe (EZU), Japan (EWJ), and welcome dampener for US inflation.

Central Banks drive markets lower again

Market whipsawed by Fed accelerating rate hike, and Bank of England’ stark ‘stagflation’ warning. 3% US 10-year bond yields pressured valuations, swamping strong US and European Q1 earnings. Plunging Chinese data showed global risk of its zero-covid lockdowns, whilst US expanded its delisting list. Potential ‘peak’ US inflation report key this week See latest presentation, video updates, and twitter @laidler_ben.

Big equity sell-offs in context

Investors panicked with global risks and sharp sell offs. But history shows positive risk/reward to buying ‘4% down days’ and average S&P 500 ‘corrections’ over the following year.

Not far from peak ‘Fed fear’

Markets now pricing 3.5% Fed interest rate peak and $95bn/month ‘quantitative tightening’ bond sales. We see easing of Fed ‘vice’ that pressuring valuation and rising recession fears.

Lessons from earnings season

Despite individual big-tech weakness from NFLX to AMZN, Q1 earnings season has been strong so far, with all sectors beating forecasts, and profits up 10% in US and 35% in Europe.

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The oil investment strike

Lack of new investment means ‘high-for-longer’ prices. New drilling activity is -50% from prior highs. See XLE and @OilWorldWide.

Contagion to crypto assets. TRON surge

Crypto driven lower in the sharpest sell-off since January, led by altcoins, on contagion from global equities. BTC and ETH well below key $40,000 and $2,900 levels. TRON (TRX) outperformed with stablecoin plans. eToro added UMA and API3 coins to platform, taking total to 64.

Commodities stay resilient, as oil rises

Commodities bucked the global markets weakness. Oil prices rose over $110/bbl. after EU announced a Russian oil ban plan and the OPEC+ meeting kept supply tight. US natgas soared to 14-yr high. Strong oil stock Q1 results, from BP.L and SHEL.L boosted ‘windfall tax’ talk.

The week ahead: Braced for Fed follow thru

1) Have we seen peak 8.5% US inflation (Wed), plus Fed speakers after FOMC.

2) Q1 earnings shifts to International, including SONY, NTDOY, TM, BABA.

3) China trade and inflation data as navigate covid lockdowns.

4) Google developer event and IEA renewables update.

Our key views: All about valuations now

Markets seeing biggest sell-off since 2020 covid crash, as bond yields crush valuations, and overwhelm decent earnings. Fundamentals stressed but secure. See relief from ‘peak’ inflation, and China stimulus. Focus on ‘barbell’ of cheap cyclicals and ‘defensives’: Value, commodities, alongside healthcare, and high dividends. We are cautious on bonds.

Written by a team of experienced financial analysts at eToro.

This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation. Past performance is not an indication of future results.