S&P Retraces From 5,100 Level After An Aggressive Spike

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Stocks

Summary:

On Friday, the stock market weakened as the world's largest technology companies retreated following a robust rally fueled by optimism surrounding artificial intelligence.

In the world's largest equity market, a series of record-breaking achievements propelled the S&P 500 momentarily beyond the significant milestone of 5,100. However, every member of the "Magnificent Seven" group of mega-cap companies experienced declines, except for Nvidia Corp., which managed to maintain a slight increase after reaching a valuation of $2 trillion earlier.

S&P Retraces From 5,100 Level After An Aggressive Spike_1

According to Michael Hartnett of Bank of America Corp., a surge in artificial intelligence stocks coupled with optimism surrounding economic expansion amid relaxed monetary policies form the essential elements of a "magic sauce" poised to fuel further advancements in equity markets.

Thursday's surge in Nvidia's shares resulted in approximately $3 billion in unrealized losses for short sellers, as analyzed by S3 Partners LLC, which described it as an "AI generated nightmare" for bearish traders.

These mark-to-market losses represent another setback for contrarians who have argued that Nvidia's exceedingly high valuations and speculative fervor indicated the presence of a market bubble on the verge of bursting. According to S3, the chipmaker ranks as the third-largest short in the United States, with $18.3 billion worth of shares borrowed and sold.

While the rally in US tech giants has raised concerns about a potential bubble, Barclays Plc strategists suggest that the price movement is in line with earnings fundamentals.

As long as stock performance remains consistent with profit outlooks, the "fear of missing out" is expected to persist in the tech/AI sector, with investors continuing to afford the benefit of the doubt to lofty valuations, as noted by the team led by Emmanuel Cau.

Goldman Sachs Group Inc. economists have adjusted their projection regarding the timing of the Federal Reserve's interest rate cuts, now forecasting a commencement in June. This revision follows a thorough analysis of recent statements from the central bank and the minutes of its January meeting.

The US investment bank has revised its earlier forecast of a rate cut in May, now anticipating four reductions this year instead of five. These cuts are expected to occur in June, July, September, and December. Additionally, Goldman Sachs anticipates four more cuts next year, compared to the previous forecast of three, while maintaining the same terminal rate range of 3.25% to 3.5%, as outlined by economists including Jan Hatzius.

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Zi Cheng

Traders' Opinions

Economic

In February, the expectations gauge by the Ifo Institute climbed to 84.1 from the previous month's 83.5, surpassing analysts' forecasts of a modest increase to 84. Meanwhile, an index measuring current conditions remained unchanged.

Germany IFO Edges Higher Than Expectations_1

Earlier on Friday, another report confirmed that German output contracted by 0.3% in the fourth quarter, primarily due to a decline in investment, signaling the country's trajectory toward its first recession since the onset of the pandemic.

The data underscore Germany's prolonged economic fragility, which is raising growing concerns among politicians in Berlin. This week, the government revised its growth projection for 2024 significantly downward to a mere 0.2%, following a 0.3% contraction throughout 2023.

The export-driven economy is grappling with several challenges including subdued foreign demand, elevated interest rates, disruption in Russian energy supplies, and geopolitical tensions. Additionally, internal disagreements within Chancellor Olaf Scholz's three-party coalition and a court ruling disrupting spending plans have exacerbated uncertainty.

Germany's heavy reliance on manufacturing, compared to many other nations, has led to a prolonged downturn in this sector. A survey conducted on Thursday revealed an unexpected intensification of this decline in February, with new orders plummeting both domestically and internationally.

The German central bank predicts a potential GDP decline in the first quarter, which could push the country into a recession. Bundesbank President Joachim Nagel stated on Friday that stagnation might persist in the second quarter before signs of recovery emerge.

This forecast is expected to fuel discussions regarding Germany's long-term outlook, which is overshadowed by worries about excessive bureaucracy, an aging workforce, and insufficient investment in infrastructure and critical technologies.

On Wednesday, Economy Minister Robert Habeck emphasized the necessity for further reforms to uphold Germany's competitiveness amidst a significantly altered landscape.

Anticipated rate cuts by the European Central Bank and certain other central banks in the upcoming months could provide some relief. Meanwhile, it is expected that wage hikes for workers and decelerating inflation will bolster private consumption.

The Federal Statistics Office confirmed on Friday that Germany is widely anticipated to experience another technical recession in the first quarter of this year, following a 0.3 percent contraction in the last quarter of the previous year, as initially estimated.

To stay updated on all economic events of today, please check out our Economic calendar

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Alex

Economic

Stocks

In an interview with Fox Business Network, Ibrahim indicated that the economy could enter a downturn before early 2025.

She predicted that once a recession occurs, the S&P 500 could decline to as low as 3,500, representing a potential 26% drop from current levels. Ibrahim attributed this outlook to the Federal Reserve’s “aggressive” monetary tightening implemented since March 2022. With interest rates currently at their highest since 2001, economists have long warned that such levels could excessively tighten financial conditions and lead to a recession. Moreover, economists have highlighted that the full impact of Fed rate hikes is still unfolding, although initial signs of damage are emerging.

Ibrahim pointed out that auto loan delinquencies are on the rise, indicating that consumers are struggling to keep up with debt payments amidst inflationary pressures and increasing borrowing costs.

The economy’s savings rate remains near a historic low, with Americans saving just 3.7% of their income in December, roughly half of the rate seen in 2019. As tighter financial conditions persist, consumers are expected to save more and spend less, feeling the strain. A study by the San Francisco Fed suggests that Americans likely depleted their excess savings from the pandemic by the third quarter of 2023. Additionally, JPMorgan estimated that 99% of Americans would be financially worse off this year compared to pre-pandemic levels.

Roukaya Ibrahim cautioned that this could trigger a vicious cycle in the economy. Once a recession takes hold, stocks will be particularly vulnerable, especially given the prevailing bullish sentiment among investors. The latest Investor Sentiment Survey from the American Association of Individual Investors found that 44% of investors felt bullish about stocks over the next six months. This optimism contrasts sharply with Ibrahim’s warnings about the impending economic downturn and the potential consequences for stock markets.

Ibrahim anticipates a 10% decline in corporate earnings once a recession hits, which underpins her 3,500 price target for the benchmark index. This projection reflects her assessment of the economic landscape and its potential impact on corporate profitability.

In addition to Ibrahim’s warnings, other market commentators have also raised concerns about an impending recession and its implications for stocks. According to the “full model,” there is an 85% likelihood of the US entering a downturn, marking the highest probability since the 2008 Great Financial Crisis. Furthermore, economists at the New York Fed are pricing in a 61% chance of a recession occurring before January 2025. These assessments underscore the growing apprehension within the financial community regarding the economic outlook and its potential ramifications for the stock market.

Source：THE UBJ

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Ukadike Micheal

Economic

Forex

The European Central Bank (ECB) is unlikely to have enough data to decide on interest-rate cuts until June, even with inflation expected to hit the 2% target this year, according to Yannis Stournaras, a member of the ECB Governing Council. Stournaras notes that while reaching the 2% target is anticipated in the autumn, policymakers will exercise caution and avoid premature actions that could jeopardize progress, considering a move in April only if surprising data emerges.

Stournaras, who also heads the Greek central bank, emphasizes the importance of a gradual approach to interest-rate adjustments. The debate among officials centers on whether the first cut will occur in April or June, with less attention given to the pace of easing and its longer-term settlement. Stournaras advocates for a measured strategy, stating that moving toward a neutral level, around 2%, will take time, and he expects this to be achieved by the end of the next year.

Despite expectations that inflation will approach the target sooner than anticipated, Stournaras underscores the need for certainty before any rate cuts are considered. He highlights the potential risks associated with wage growth above 4% but notes that companies use overall cost growth to determine margins, which is lower.

As the ECB's next policy meeting approaches, the focus intensifies on the timing of rate cuts, with Stournaras indicating that April is an option if the right data emerges but ruling out any action in March. He emphasizes a cautious approach, stating that they won't take the risk of cutting rates until they are absolutely sure of being on track to meet the target.

In a broader economic assessment, Stournaras expresses doubts about the economy's ability to achieve the previously projected 0.8% growth this year, suggesting it may fall short of expectations.

From a technical standpoint, the cautious approach of the ECB and Stournaras reflects the delicate balance between managing inflation targets and supporting economic growth. The timing and pace of interest-rate adjustments carry significant implications for financial markets, influencing investor sentiment and market dynamics. As policymakers navigate uncertainties, the market will closely watch for signals of economic resilience and the central bank's commitment to achieving its objectives.

The ECB's deliberations on interest-rate cuts and the cautious stance underscore the complexity of managing monetary policy in a dynamic economic environment. The potential impacts on inflation, economic growth, and market stability require a nuanced and strategic approach. As events unfold, the market will keenly observe how central banks navigate these challenges and the ripple effects on global financial landscapes.

Source: Bloomberg

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Ukadike Micheal

Economic

Forex

The U.S. dollar was poised for its first weekly decline in 2024, marking a pause for investors following nearly two months of upward momentum driven by fading expectations for Federal Reserve rate cuts. Strong economic data and signals from Fed officials suggesting a delayed timeline for rate cuts contributed to the dollar's earlier gains.

Analysts note that the dollar's retracement in 2024 has been more pronounced than in U.S. yields, and its further strength in the near term may be limited. Athanasios Vamvakidis, Global Head of G10 Forex Strategy at BofA Global Research, anticipates a weakening dollar in the second quarter, assuming the Fed initiates rate cuts in June and continues this trend quarterly. BofA expects the euro to strengthen to 1.15 against the dollar by year-end.

However, uncertainties persist, as Vamvakidis points out that a robust U.S. economy might alter this projection if the Fed is unable to cut rates in June or within the year. The dollar index, measuring the currency against six others, dropped 0.03% to 103.89, poised for its first weekly fall since December, reflecting the shifting sentiment.

Some analysts attribute the dollar's correction this week to increasing risk appetite, particularly as global shares experienced a record-breaking week following Nvidia's strong earnings that boosted tech stocks. Francesco Pesole, Forex Strategist at ING, suggests that the momentum in equity markets might continue, especially if U.S. rates keep rising.

The euro, meanwhile, rose slightly against the greenback, but concerns linger regarding Germany's economic downturn, despite improved business morale in February. Kit Juckes, Macro Strategist at Societe Generale, highlights that the euro zone's healing is not uniform, with Germany facing deeper economic challenges.

Looking ahead, Personal Consumption Expenditures (PCE), the Fed's preferred inflation gauge, is expected to influence rate cut expectations. If PCE data indicates strength, rate cut expectations may be pushed further away, influencing the dollar's trajectory.

In the currency market, the Swedish crown and Norwegian crown emerge as potential alternatives to the euro, with the Swedish crown reaching its highest level against the euro since January. However, market dynamics remain dynamic, and a catch in the trend could alter currency preferences.

The U.S. dollar's potential weekly decline in 2024 signifies a pivotal moment in currency markets, influenced by changing expectations for Federal Reserve rate cuts. The interplay between economic data, global events, and central bank decisions creates a landscape of shifting currencies. As investors navigate this dynamic environment, a nuanced approach is crucial for adapting to evolving market conditions and making informed decisions.

Source: Reuters

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Swissquote

Stocks

Bond

We knew that yesterday was going to be a good day – at least for the stock markets, given that Nvidia defied the expectations that it would – maybe – fail to deliver $20bn sales in the latest quarter.

But the company announced $22bn sales. And because a potential misstep from Nvidia was seen as a major risk of a downside correction in stock markets, equity bulls broke their chains free after the blowout earnings. The star of the past two years, the most important stock on planet Earth, or the AI revolution’s mascot Nvidia ended up jumping 16% in a single session and stole the title of the biggest one day jump from Meta – which had just obtained this title after its latest quarterly report a couple of weeks ago. Nvidia added $277 billion to its market cap just yesterday. Morgan Stanley raised its price target from $750 to $795, and Bank of America raised its target from $800 to $925. Allez, let’s round it up to $1000 and see if Nvidia could hit that $1000 mark!

Euphoria and fun aside, the expectation that the narrow stock rally, mainly shouldered by tech, would broaden up has dissipated like dust in the sky in the aftermath of the first earnings season of the year. Tech, and everything related to tech is doing just fine. And the others surf on that optimism. The S&P500 rallied more than 2% and hit a fresh record yesterday and the rally is accelerating above the October 2022 to now ascending range. Nasdaq 100 soared 3% and traded close to an ATH. The Dow Jones industrial, European Stoxx 600 and Japanese Nikkei 225 traded at an ATH as well.

Investors are still wondering whether the US stocks haven’t become too expensive – because the S&P500’s PE ratio is around 23. In this context, Japanese stocks, which also benefit from the AI boom, extra-low Japanese rates, and super cheap Japanese yen trade with a PE ratio of only 16. That makes the Japanese stocks a good alternative for investors who want to increase their AI exposure and diversify geographically. Nikkei’s two heavy weights: Tokyo Electron – that makes semiconductor manufacturing equipment and Adventest – which builds chip-testing machines are both doing great.

And oh, there is also the idea that the Chinese chipmakers would be a cheap option to the US and Japanese counterparts. Yes, the Chinese chipmakers have no option but to fill in the gap from the US export ban. The Chinese companies will be constrained to buy Made-in-China chips, and the Chinese government will put all its weight to make things work – because they can’t afford to fall behind the biggest technology race of the decade. But investing in China implies taking the Chinese government risk. The question is: is growth potential in China big enough to take that risk? At this point, when the world is rushing to AI, I don’t think that the Chinese demand is necessarily needed. (Answer: not necessarily). And speaking of China – real quick – the latest data showed that new home prices dropped the most in 10 months. China’s property crisis gives no signs of improving. On the contrary.

FX and commodities

The cheery mood in the global stock markets was completely decoupled with the gloomy mood in the sovereign space. The US 2 and 10-year yields rose yesterday because some more Federal Reserve (Fed) members warned about cutting the US rates too early and too much. Yesterday’s stronger-than-expected manufacturing and housing data came as further evidence that the US economy doesn’t necessarily need rate cuts in a rush. But the US dollar appetite was nowhere to be found, the dollar index remains offered into the 100-DMA. The 3-month risk reversals of the USD against EM currencies showed that option traders are the least bullish on the US dollar against EM currencies since 2007. That’s interesting, because the US economic data continues to surprise to the upside. The Fed rate cut expectations are being scaled back, yet the dollar doesn’t gain the attraction that it deserves. That’s a good thing, mind you, to prevent the US inflation from spilling to the rest of the world, but it’s not fully rational.

Anyway, in Europe, inflation data came as no surprise while the PMI data showed that activity hit an 8-month high in February. But cracks are widening with German manufacturing falling to the lowest levels since October. Still, the German 10-year bund yield rose to 2.50% and the EURUSD shortly tested its 50-DMA – near 1.0883 – to the upside yesterday and is trying to clear its 200-DMA sustainably. The retreat in dovish European Central Bank (ECB) expectations support the euro’s rebound against the greenback, as the market pricing now suggests less than 100bp cut from the ECB this year.

In energy, US crude advanced to $79 per barrel yesterday after a lower-than-expected jump in US oil inventories last week, while nat gas futures are having a hard time rebounding after a dip to 1.55. The European nat gas futures continue to push lower as traders are selling nat gas for next winter – a sign of confidence that Europe will continue to receive the Russian gas shipments as we near the second anniversary of Russia’s invasion of Ukraine. Europe is not less shocked faced with a war on its continent but is clearly less capable of putting more restrictions on Russian energy – given the cost-of-living crisis and Germany’s descent into hell. Therefore, buying defense stocks is a better way to navigate through war in Europe than buying nat gas futures.

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ING

Economic

One day before the second anniversary of Russia's invasion of Ukraine, the second estimate of fourth-quarter GDP growth has confirmed the shallow German recession in 2023, while the latest Ifo index reading gives very little hope for imminent improvement.

In more detail, the GDP components for the fourth quarter of 2023 confirmed that the economy shrank by 0.3% quarter-on-quarter. While investments were a drag on the economy, private consumption was slightly up. To put these numbers into perspective, since the start of the war in Ukraine, the German economy has been stuck in a de facto stagnation. Industrial production, meanwhile, has been mired in misery, at some 10% below pre-pandemic levels at the end of 2023. The reasons for the German weakness have been discussed endlessly and can be simply summarised as a dismal combination of cyclical headwinds and a long list of structural weaknesses.

Getting out of this vicious circle will not be easy and there are indeed very few signs of an imminent improvement. Yesterday’s PMI readings were a disappointment, particularly for the manufacturing sector and this morning’s Ifo index also gave very little hope of an imminent rebound. The February headline number came in at 85.5, from 85.2 in January. While the current assessment component remained unchanged, expectations improved somewhat, albeit from very low levels. However, the near-term outlook for the German economy is not bright. Tensions in the Red Sea have led to new supply chain frictions. Strikes since the start of the year would make every Frenchman (or Frenchwoman) proud and an increasing number of insolvencies have increased the chances of yet another quarter of contraction. It is questionable whether the very few glimmers of hope, stemming from the pick-up in truck traffic on German highways or the gradual turning of the inventory cycle, are enough to prevent another economic contraction in the first quarter of 2024.

German government still in disagreement on how to support the economy

Earlier this week, the German government presented its growth forecast, which at 0.2% GDP growth for this year, is actually still above our own forecast of -0.2%. Probably even worse, the government’s long-term forecasts for the economy are currently at 0.5%, finally reflecting the consequences of no policy action. While many government members were in denial last summer when the international debate about Germany being the sick man of Europe started and even earlier this year said that the economy only needed a strong coffee to wake up, the tone has changed. There now seems to be an agreement and acknowledgement of the weak state of the economy but, unfortunately, there still is disagreement on what to do. The fact that the government’s decision on tax relief, which was actually taken last summer, has still not passed the Upper House and was trimmed down this week from €7bn to €3bn illustrates that the real sense of urgency is not yet very high.

All in all, data releases and political events this week confirm our view of yet another minor contraction of the German economy in the first quarter and a weak recovery thereafter.

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