Richly-Valued Equities Under Pressure

Image Source: PixabayMARKETSStocks faced a second consecutive day of declines on Wednesday, deviating from the expected positive start to the new year associated with the Santa Claus rally. The Nasdaq Composite, particularly sensitive to technology stocks, felt the impact of the “Magnificent 7” New Year hangover as investors reassessed their positions in tech stocks following the recent Apple sell-off, compounded by higher yields.The release of FOMC minutes delivered an unwelcome update that appeared both hawkish and cautious on the macroeconomic front. Federal Reserve board members indicated an inclination to maintain a restrictive policy stance until clear evidence of sustained movement toward their inflation target is observed. While inflation data is trending toward their target, the market’s response to the Fed’s stance, particularly its fight-or-flight mode, may be more influenced by Friday’s Non-Farm Payrolls (NFP) report.The Federal Reserve’s more sobering outlook dampened sentiment in stock trading on Wednesday, leading to increased losses in the session’s final minutes. The “Magnificent Seven” stocks had a second-straight lacklustre performance, with six experiencing declines, notably Tesla (TSLA), which saw a 4.0% drop. Tesla shares, trading at 65 times projected earnings, face significant headwinds if bond yields continue to rise.The valuation premium for U.S. tech began to rise after Jerome Powell’s pivot in January 2019. At that point, the forward multiple for tech was roughly equivalent to that of the broader market. Presently, tech is trading at 27x, approximately seven times more expensive than the rest of the market.With concentration risk back in the fore, even weak data driving recession concerns could hurt equities with rich valuations that may undergo de-rating as long-term growth expectations are reassessed.On the interest rates front, the U.S. 10-year Treasury yield briefly breached the crucial 4% mark before retracing to 3.92, carrying an eerie undertone. The retracement serves as a subtle dovish reminder signal, suggesting that the hawkish sentiments conveyed in the Fed minutes may not be causing widespread concern throughout all capital markets. But why we are trading negative term premiums right now is perhaps an issue that might need to be resolved once the rate cut froth speculation settles down.Finding meaningful insights into the market’s medium-term trajectory during the initial trading days of the new year is often elusive. However, sustained stock market losses by the end of the week, especially in connection with upcoming critical U.S. labour market data releases, could become a significant topic of interest for bearish market participants.The beginning of 2024 has seen a slight recalibration of market-based interest rate cut expectations, lingering geopolitical concerns, position adjustments ahead of U.S. labour statistics, and a flurry of corporate debt issues raising supply concerns, all contributing to a subdued start to the year in financial markets.The macroeconomic outlook is best characterized by a high degree of uncertainty, and one doesn’t need a room full of Fed economists to emphasize this point.OIL MARKETSOil futures climbed over 3 % on Wednesday. This surge was attributed to a combination of factors, including a supply disruption at Libya’s largest oil field, El Sharara, following a series of anti-government protests. Additionally, explosions near the tomb of Iranian General Qasem Soleimani heightened geopolitical tensions in the Middle East.The terrorist attack has the potential to heighten instability in the already volatile region, which has experienced conflicts such as the Hamas-Israeli war, attacks by the Houthi militia on commercial vessels in the Red Sea, and ongoing violence in Iraq, Syria, and this week, in Beirut, Lebanon.Yet, unless a substantial supply disruption occurs in the Middle East, poor macroeconomic data could act as the ultimate rally dampener. Global economic news on Wednesday proved bearish for energy demand. The U.S. December S&P manufacturing PMI increased by +0.7 to 47.4, marking the fourteenth consecutive month of U.S. manufacturing activity being in the sub-50 contraction range. I’m pretty sure that constitutes a manufacturing recession—if services (or the US latte economy) continue to catch down, oil prices will most certainly slide.Furthermore, November JOLTS job openings unexpectedly declined by -62,000 to a 2-1/2 year low of 8.790 million, indicating a weaker labour market than anticipated, which was expected to see an increase to 8.821 million. Additionally, the German December unemployment rate rose by +0.1 to a 2-1/2 year high of 5.9%.FOREX MARKETSInvestors returned from the Christmas break with a preference for defensive assets, leading to a sharp correction higher for the dollar. European currencies were adversely affected by this shift. The trend of dollar selling and European FX buying observed in December was influenced by the dovish stance at the December FOMC meeting. Still, some of the rate-cut enthusiasm is dissipating.The current economic data from the United States has not significantly impacted the FX markets. However, the real test is expected on Friday, and it could lead to choppy market conditions regardless of the outcome.More By This Author:Tech Shares Wobble To Start The Year
Japan Earthquake Marks An Inauspicious Start To 2024
Asia Open Insights : Beware Of The Perma Bears In 2024


  • Total Score 0%
User rating: 0.00% ( 0
votes )

Leave a Reply

Your email address will not be published. Required fields are marked *