The Magnificent Seven's Impact on the S&P 500 Reaches Unprecedented Levels

Economic

Stocks

Summary:

Seven leading stocks now make up 30% of the index, with Nvidia and Meta's gains outweighing Tesla's losses, solidifying the tech sector's dominance within the S&P 500.

The dominance of the tech sector within the S&P 500 has reached unprecedented levels, with seven prominent stocks now accounting for nearly 30% of the index's total weight. Despite varying performances among these stocks, the remarkable surges of Nvidia, Meta, and Amazon have propelled the group to new heights.

Nvidia, in particular, has experienced an exceptional 80% surge, driven by the soaring demand for its AI computing chips. This surge reflects not only the increasing adoption of artificial intelligence but also the crucial role that Nvidia plays in powering this technological revolution. Meta, formerly Facebook, and Amazon have also seen significant gains of 48% and 24% respectively, further solidifying the tech sector's dominance within the market.

However, amidst this surge, Tesla has faced significant challenges, with its shares plummeting approximately 30%. The decline in Tesla's performance is largely attributed to the slowdown in demand for electric vehicles and concerns about the company's ability to maintain its competitive edge in the rapidly evolving automotive industry.

From a technical standpoint, the concentration of market influence within a few select stocks presents both opportunities and risks for investors. On one hand, the impressive gains of key tech stocks signal strength and innovation within the sector, attracting investors seeking growth opportunities. On the other hand, such heavy weighting in the index by a few select stocks amplifies market volatility and systemic risk, as any adverse developments within these companies could significantly impact the broader market.

Moreover, the increasing dominance of tech giants raises concerns about market diversification and the potential for a tech-driven bubble. As these companies continue to expand their influence, their performance becomes increasingly correlated, potentially exacerbating market downturns.

Nevertheless, the tech sector's resilience amidst economic uncertainties and evolving consumer behavior underscores its importance as a driver of market performance. Investors must carefully assess the risks and rewards associated with this concentration of market influence, diversifying their portfolios to mitigate potential downside risks while capitalizing on growth opportunities within the tech sector.

While the Magnificent Seven's ascent in the S&P 500 reflects the dynamism and innovation of the tech sector, it also underscores the need for vigilance and prudent risk management. As these influential stocks continue to reshape the market landscape, investors must navigate carefully to capitalize on opportunities while safeguarding against potential pitfalls.

Source: Bloomberg

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Kevin Du

Economic

Britain’s economy has taken a step closer to exiting recession after official figures showed growth continued in February despite a washout month for construction and retail after one of the wettest starts to a year on record.

The Office for National Statistics (ONS) said gross domestic product (GDP) rose by 0.1% in February, matching City economists’ forecasts and extending a recovery after growth in January was revised up from 0.2% to 0.3%.

Liz McKeown, an ONS director of economics statistics, said: “The economy grew slightly in February with widespread growth across manufacturing, particularly in the car sector. Services also grew a little with public transport and haulage, and telecommunications having strong months.“Partially offsetting this there were notable falls across construction as the wet weather hampered many building projects.”

The UK met the technical definition of recession after contracting in the third and fourth quarters of last year. An end to the slump will require a continued expansion in March to meet a quarterly return to growth.

The data comes with Rishi Sunak under pressure to show progress on the economy before sending voters to the polls in a general election later this year, with the Conservatives trailing Labour in opinion polls.

The latest figures also show growth of 0.1% over the three months to the end of February, the first expansion over a three-month period since last summer, with activity recovering from a slump last year as households cut back on spending amid the cost of living crisis.

The chancellor, Jeremy Hunt, said the figures were a “welcome sign that the economy is turning a corner, and we can build on this progress if we stick to our plan”.

Growth in February was driven by manufacturing in particular, with a sharp recovery in car production, where output was up by 17.8% compared with the same month a year earlier.

However, construction output collapsed by 1.9% on the month as heavy rainfall forced cranes to fall idle on building sites across the country. The UK’s dominant services sector, which makes up about four-fifths of the economy, also struggled for growth momentum, with an expansion of only 0.1% on the month amid weaker activity in retail and wholesale distribution.

The ONS highlighted figures showing the fourth wettest February on record in England, contributing to fewer sales by household goods and food stores but increased online sales.

It also said conflict in the Middle East had disrupted global supply chains, hitting retailers, vehicle mechanics and health and social work, where approximately one in 10 businesses were affected.

Economists said that GDP would need to fall by an unlikely 1% or more in March for the economy to contract over the first quarter of 2024 as a whole, meaning an escape from a short and shallow recession is widely anticipated. Business surveys have also pointed to continued strength in private sector activity in March.

Paul Dales, the chief UK economist at the consultancy Capital Economics, said: “As a result, we can safely say, after lasting just two quarters and involving a total fall in GDP of just 0.4% or so, [that] the recession ended in the fourth quarter.”

However, growth is expected to remain weak while households and businesses remain under pressure from elevated Bank of England interest rates and significantly higher prices for goods and services than three years ago.

Despite the monthly recovery in output at the start of 2024, GDP remains below its level of June 2023, and has stayed broadly flat since early 2022.

Paul Nowak, the general secretary of the TUC, said: “Our economy is still smaller than this time last year with growth stuck in the slow lane. Real wages are still worth less than in 2008. And millions are struggling to cover their bills.

“After 14 years of stagnation you’ll be hard-pressed to find many people who feel better off.”

Source: The Guardian

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Thomas

Commodity

Market Overview

Oil prices increased on Friday due to rising tensions in the Middle East, potentially disrupting supply from the oil-rich region. Despite this uptick, oil is poised for a weekly decline influenced by the reduced likelihood of U.S. interest rate cuts this year.

The situation escalated following a suspected Israeli airstrike on Iran’s embassy in Damascus, with Iran vowing retaliation. Such geopolitical risks, alongside OPEC+’s supply cuts and improving global economic conditions, have significantly impacted oil price forecasts.

However, ongoing U.S. inflation concerns temper these gains, suggesting a cautious outlook for the oil market.

Natural Gas Price Forecast

Natural Gas and Oil Forecast: Middle East Tensions Underpin Energy Sector_1

Today’s analysis of Natural Gas (NG) reflects a decrease, with the price falling to $1.90, down by 0.52%. The pivot point stands at $1.89, critical for maintaining a bullish stance. Resistance levels are set at $1.95, $2.00, and $2.04, suggesting possible ceilings for upward movement.

On the downside, support is identified at $1.84, with additional layers at $1.78 and $1.72 that could arrest further declines. Both the 50-Day Exponential Moving Average at $1.94 and the 200-Day EMA at $1.89 underline this pivot, indicating potential price stability.

However, a break below $1.89 could lead to a sharp selling trend, warranting vigilant market monitoring.

WTI Oil Price Forecast

Natural Gas and Oil Forecast: Middle East Tensions Underpin Energy Sector_2

Today’s technical outlook for USOIL indicates a slight increase, with the current price marked at $85.60, up by 0.13%. The critical pivot point stands at $85.44, setting a baseline for bullish sentiment above this threshold.

Resistance levels are identified at $86.63, $87.63, and $88.53, respectively, offering potential hurdles in upward movement. Support levels to watch are $84.58, $83.57, and $82.54, providing cushions against downward trends.

The 50-Day Exponential Moving Average at $85.74 slightly surpasses the pivot, suggesting underlying strength, while the 200-Day EMA at $84.00 further bolsters support.

A break below the pivot point could trigger a notable selling trend, highlighting the need for vigilance around this key level.

Brent Oil Price Forecast

Natural Gas and Oil Forecast: Middle East Tensions Underpin Energy Sector_3

Today’s assessment of UKOIL reveals a modest uptick to $90.20, a gain of 0.06%. The established pivot point at $89.99 marks a crucial juncture; trading above this level suggests a bullish outlook. The chart shows resistance levels at $90.92, $91.90, and $92.89 that may challenge further advances.

Conversely, support is positioned at $89.15, with further buffers at $87.89 and $86.37 potentially stabilizing any declines. The 50-Day Exponential Moving Average closely aligns with the pivot at $90.01, reinforcing current levels, while the 200-Day EMA at $88.02 supports a longer-term bullish trend.

Should prices fall below $89.99, a sharp selling trend could be triggered, necessitating cautious monitoring.

Source: FX Empire

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Cohen

Economic

Commodity

Oil prices rose on Friday as heightened tension in the Middle East raised the risk of supply disruptions from the oil-producing region, though prices are set for weekly losses amid expectations of fewer US interest rate cuts in 2024.

Brent crude futures climbed 51c, or 0.57%, to $90.25 a barrel by 4.20am GMT, while US West Texas Intermediate crude futures rose 61c, or 0.72%, to $85.63.

The gains erased some losses from the previous session, which was dominated by worries about stubborn US inflation that dampened hopes for an interest rate cut as early as June.

Suspected Israeli warplanes bombed Iran’s embassy in Damascus in a strike for which Iran has vowed revenge, ratcheting up tensions in a region already strained by the Gaza war.

Israel has not said it was responsible but Iran’s supreme leader, Ayatollah Ali Khamenei, said on Wednesday Israel “must be punished and it shall be” for the attack.

The US expects an attack by Iran against Israel but one that would not be big enough to draw Washington into war, according to a US official. Iranian sources said that Tehran has signalled a response aimed at avoiding major escalation.

Israel is keeping up its war in Gaza but is also preparing for scenarios in other areas, Prime Minister Benjamin Netanyahu said on Thursday.

“The geopolitical risks remain elevated,” ANZ Research said in a note, adding that oil prices have jumped almost 19%, also supported by improving economic conditions and supply cuts by oil cartel Opec and allies, together called Opec+.

In Europe, where the labour market has begun to soften and growth is stagnating, central bankers left the policy rate unchanged on Thursday but signalled they remain on track to cut rates as soon as June.

“The European Central Bank’s decision to leave policy rates unchanged ... was expected, but accompanying statements open the door for near-term monetary easing,” S&P Global Market Intelligence said in a note.

However, in the US Federal Reserve officials signalled on Thursday that there was no rush to cut interest rates as sticky US inflation remains a concern.

Oil prices were still set for weekly declines as Brent and WTI were heading for more than a 1% drop by 4.20am GMT on Friday.

ING analysts said they expect a pullback in oil’s rally if there is no further escalation in the Middle East or supply disruptions, adding that Opec’s latest monthly market report was also in line with expectations.

“We maintain our forecast for Brent to average $87 a barrel over the second quarter of this year,” the ING analysts said.

Source：Reuters

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FXOpen

Economic

Commodity

Important Takeaways for Gold and Oil Prices Analysis Today

Gold price started a strong increase above the $2,350 zone against the US Dollar.

It broke a key bearish trend line with resistance at $2,345 on the hourly chart of gold at FXOpen.

Crude oil is consolidating above the $84.00 support.

There is a connecting bearish trend line forming with resistance near $85.60 on the hourly chart of XTI/USD at FXOpen.

Gold Price Technical Analysis

On the hourly chart of Gold at FXOpen, the price formed support near the $2,300 zone. The price remained in a bullish zone and started a strong increase above $2,320.

It broke a key bearish trend line with resistance at $2,345. The bulls even pushed the price above the $2,350 level and the 50-hour simple moving average. Finally, it traded to a new all-time high at $2,395.

Gold Price Hits New High While Crude Oil Price Consolidates_1

The price is now consolidating gains near the $2,385 zone and the RSI corrected from 80. Initial support on the downside is near the 23.6% Fib retracement level of the upward move from the $2,319 swing low to the $2,395 high at $2,378.

The first major support is near the $2,350 zone and the 50-hour simple moving average. It is close to the 61.8% Fib retracement level of the upward move from the $2,319 swing low to the $2,395 high.

If there is a downside break below the $2,350 support, the price might decline further. In the stated case, the price might drop toward the $2,325 support.

Immediate resistance is near the $2,395 level. The next major resistance is near the $2,400 level. An upside break above the $2,400 resistance could send Gold price toward $2,420. Any more gains may perhaps set the pace for an increase toward the $2,440 level.

Oil Price Technical Analysis

On the hourly chart of WTI Crude Oil at FXOpen, the price found support near the $84.00 zone against the US Dollar. The price formed a base and started a recovery wave above $84.50.

The bulls were able to push the price above the 50% Fib retracement level of the downward move from the $85.99 swing high to the $84.33 swing low. The hourly RSI is near the 50 level, but the price is struggling near the 50-hour simple moving average.

Gold Price Hits New High While Crude Oil Price Consolidates_2

Immediate resistance is near the $85.35 level. There is also a connecting bearish trend line forming with resistance near $85.60. It is close to the 76.4% Fib retracement level of the downward move from the $85.99 swing high to the $84.33 swing low.

A clear move above the trend line resistance could send the price toward the $86.40 resistance. Any more gains might send the price toward the $87.00 level.

Conversely, the price might start a fresh decline from the $85.35 resistance. Immediate support sits near the $84.35 level. The next major support on the WTI crude oil chart is $84.00.

If there is a downside break, the price might decline toward $82.50. Any more losses may perhaps open the doors for a move toward the $81.20 support zone.

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Owen Li

Economic

Bond

Central Bank

Equity and fixed-income investors were shocked during the week by the release of the official US inflation data, which confirmed a massive re-acceleration in services (rather than goods) inflation in March, with the annualised trend now running at an incredible 6.5 per cent (or 7.7 per cent if we exclude housing).

Despite ongoing deflation in core goods prices in March, which declined by 1.1 per cent on an annualised trend basis, overall core inflation in the US was reported to have re-accelerated to 4.5 per cent from a trough around 3 per cent late last year.

When the US Federal Reserve was hitting its 2 per cent inflation target before the pandemic, core services inflation was expanding at an annual rate of just 3 per cent. That is, less than half its current pulse.

The surge in services inflation is being driven by an excessively tight US labour market, which is pushing up wages that represent the primary cost of service-orientated businesses (ie people). The US unemployment rate of 3.8 per cent is notably below its long-term average and the Fed’s estimate of full employment.

Australia faces precisely the same plight: re-accelerating core inflation on the back of elevated price pressures in services industries fuelled by excessively strong wage growth, which is unsustainable and highly inflationary in an environment characterised by persistently poor labour productivity. Businesses are simply carrying too many people relative to the products they purvey.

This column has warned relentlessly this year that sticky services inflation will thwart the rapid mean-reversion in prices that gullible bond and equity markets were projecting. In January, bond bandits foolishly expected 175 basis points of interest rate cuts from the Fed this year, beginning in March. It was never going to happen.

Following no less than four consecutive upside surprises in the monthly US CPI prints, lackadaisical investors have been compelled to discard their “hopeium” and now anticipate only 42 basis points of cuts from the Fed, which they think will not begin easing until September or October.

Martin Place errs

For what it is worth, the even more dovish Reserve Bank of Australia is not handicapped to chisel down its target policy rate until December (markets were at one point pricing in the middle of this year), which seems heroic.

Notwithstanding that the RBA has to contend with demonstrably more challenging labour cost and productivity problems, it persists with a 4.35 per cent cash rate that is conspicuously lower than all our key peers, including New Zealand (5.5 per cent), the US (5.25 per cent to 5.50 per cent), Britain (5.25 per cent) and Canada (5.5 per cent).

Yet when Coolabah runs the RBA’s official economic models, they emphatically signal that Martin Place should have its cash rate at 5 per cent or higher in line with policy settings overseas. No wonder the Aussie dollar is so low.

Given US inflation is re-accelerating and miles above the Fed’s 2 per cent target, there is no basis for any cuts at this juncture. There is, in fact, a possibility that the world’s most important central bank could be forced to lift its cost of capital once again. Complacent investors are coming to grips with the realisation that monetary policy may not be as restrictive as it seems given President Joe Biden is running an immensely stimulatory budget deficit that represents 6 to 7 per cent of GDP. It is unprecedented in its magnitude in the post-World War Two period save for the spending required during the global financial crisis and the pandemic.

The Fed’s dovish pivot last year, predicated on ephemeral goods price deflation as supply chains reopened, was profoundly misguided, particularly in light of the fact that it precipitated the mother-of-all risk rallies, as evidenced by soaring equities and house prices, among many other things.

Fed scrambles

In the central banking lexicon, this was an easing of financial conditions that served as de facto interest rate cuts at the worst possible time. And now the Fed is desperately trying to cling to its rapidly diminishing credibility by repeatedly dismissing high inflation prints as merely part of its “bumpy road” in the vain hope that it can start lowering rates before the November presidential election. It is self-evident that rate cuts close to an election statistically favour the incumbent, and the Fed would like not to be tarred with a politically partisan brush.

After hitting 5 per cent in October last year, the US 10-year government bond yield slumped to 3.8 per cent in December as a direct result of the Fed’s pivot. The mantra was that the rate-rising cycle was over, and investors were on the cusp of securing generous rate relief that would bail out households and businesses that had based their finances on the presumption of the low-rates-for-long paradigm.

Since that time, the 10-year yield has climbed sharply higher again, hitting almost 4.6 per cent following the stonking US inflation data this week. Bizarrely, equity markets have for the time being tried to ignore the jump in their discount rates. Yet one is hard-pressed to find any serious investors who do not worry that equity valuations are rich. The last time 10-year yields hit 5 per cent, US stocks slumped more than 10 per cent.

With the spectre of intensifying conflict between Israel and Iran forcing oil prices higher and an ascendant Trump campaigning to slash migration, which would boost US labour costs, coupled with the inflationary idea of slapping tariffs on Chinese imports, the downside risks for asset prices are becoming increasingly acute.

The biggest mistake central banks always make is the vainglorious attempt to construct grand intellectual narratives that presuppose they can accurately divine their own destinies. Think the RBA’s 2020 promise – enshrined by its 2024 yield curve target – not to raise the cash rate off its 0.1 per cent lower bound until 2024 (anyone who believed Martin Place has to swallow a 4.35 per cent cash rate today).

Hogwash persists

The Fed’s dovish pivot, which hinged on the bet that transitory goods price deflation would be superseded by mean-reversion in services prices, was another rubbery vision. Indeed, it echoes the misguided belief in 2021 that persistent demand-side inflation was but a temporary phenomenon and the mistakes made by the Fed in the 1970s when it cut rates too quickly only to watch inflation re-accelerate again.

If the Fed and the RBA do not lower rates this year, there is going to be blood on the streets among cyclically sensitive borrowers. Notwithstanding the hogwash from anyone exposed to risky debt securities that their default rates are benign, substantial fissures are emerging for those inclined to open their eyes.

Standard & Poor’s reports that global corporate defaults this year are the worst since 2009. US bankruptcies last year were the highest since 2010 sans the pandemic-affected 2020 year. Australian insolvencies are the most elevated they have been in a decade, led by construction and hospitality. Defaults on non-bank home loans are rocketing through the roof in contrast to the modest arrears recorded by intensively regulated bank balance sheets.

Following the GFC, banks stopped lending to borrowers who had high probabilities of defaulting on their debts in any stress-test. These zombie borrowers were forced into the open arms of non-bank lenders eager to capitalise on the search for yield at a time when cash paid nothing. It is unambiguously this unregulated sector where all the zombie borrowers can now be found.

From a portfolio construction perspective, I like averaging into fixed-rate bond exposures (known as “duration”) as we move ever closer to a 5 per cent 10-year government bond yield. I also like moving up the capital structure in search of superior safety and liquidity, to provide optionality when asset prices do capitulate. The one thing I want to avoid like the plague is any form of illiquidity, which cannot appropriately reprice to the new normal of persistently higher risk-free discount rates.

Given high cash rates, floating-rate bonds continue to provide attractive all-in yields. And the most aggressive A to AA rated floating-rate strategies have performed robustly over the past 12 months, delivering total returns before fees north of 17 per cent. Of course, past performance is no guide to future returns.

Source: AFR

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FastBull Featured

Remarks of Officials

New York Fed President John Williams said in a speech on April 11 as follows.

Over the past year, economic growth has been higher than expected. The labor market remains strong, and the unemployment rate remains historically low. The primary objective of monetary policy is to balance restoring price stability and maintaining maximum employment, and the Federal Reserve will continue to ensure that both objectives are achieved.

The Fed has made "tremendous progress" in balancing inflation and employment goals, but it's not done yet. The labor market is now showing signs of returning to normal, but two important indicators (job openings and wage growth) still show that the labor market remains tight.

Strong structural housing demand has raised rental inflation substantially after the pandemic. The dampening effect of restrictive monetary policy on rental inflation has gradually emerged. Moreover, data on newly contracted rents suggest that rental inflation should slow further to normal levels in the coming months.

GDP growth is expected to be around 2% this year; the unemployment rate will first peak at 4% and then gradually fall back to 3.75%; and inflation will gradually fall back to 2%. However, the process may be bumpy, as we've seen in some recent inflation readings.

If the U.S. economy develops as projected in the FOMC economic forecasts in March, "it will make sense to dial back the policy restraint gradually" over the course of the year. But the future outlook is uncertain, so I will remain focused on the data.

Currently, we have so far reduced the size of our balance sheet by about $1.5 trillion. The current level of reserves remains well above the level that would qualify for an ample reserve system, and the next step will be to slow down the pace of balance sheet shrinkage. It does not mean an imminent end to balance sheet shrinkage. Rather, by slowing the pace, we're better able to facilitate a smooth transition to ample reserves.

The Fed will continue to focus on data, the economic outlook, and risks as it assesses the appropriate path for monetary policy to achieve its 2% inflation target.