Pre Asia open: Good news on Good Friday

Markets

Last week, equity markets maintained their upward momentum, propelled by solid growth indicators. The S&P 500 index recorded a 0.4% increase, with notable strength observed in the utilities, banks, and healthcare sectors. However, there was a relative lag in performance within the technology and telecom services sectors, which have historically been among the market leaders.

As the first quarter of 2024 draws to a close, it's evident that we've witnessed a whirlwind of economic and market activity. The period has been marked by several notable trends: robust growth surpassing initial expectations, a resurgence in commodity prices, the soaring heights of cryptocurrency markets, and an impressive 10% surge in the S&P 500 over Q1 alone. Additionally, US inflation has proved hotter than anticipated, adding another layer of complexity to the economic landscape.

In light of these developments, the question arises: what lies ahead for the prospect of Federal Reserve rate cuts? This quandary is particularly pertinent given the divergent forces at play. On the one hand, the stronger-than-expected economic growth may suggest a need for a higher for longer stance from the Fed to prevent overheating and inflationary pressures from spiralling out of control. On the flip side, if interest rates persist at elevated levels, it could increase the likelihood of a looming recession. Consequently, there have been calls for the Federal Reserve to contemplate implementing rate cuts as a strategy to invigorate economic activity and ease financial pressures.

First chance to trade PCE

With the US bond markets and the S&P 500 closed on Friday, investors will have the first chance to react to the PCE data today after having the weekend to contemplate its significance. But it's hard to interpret these numbers in any way other than it was good news for the Fed on Good Friday.

While the core index readings fell slightly short of consensus expectations on an unrounded basis, they still represented the third-warmest month since May of the previous year, when monthly readings began to decelerate. On a six-month annualized basis, core price growth is currently running at a rate of 2.9%.

Encouragingly, however, the "supercore" measure, which is closely monitored by the Fed and excludes housing from core services, rose by just 0.2% last month. This marks a significant improvement from the previous month's pace of 0.7%.

Overall, Friday's release painted a favourable picture, with price growth moderating at the edges even amid robust spending. These trends align with various macroeconomic narratives, such as the "soft landing" or "Goldilocks" scenario.

The haves and have-nots

The ongoing equity rally can be dissected through various lenses, with one prominent view focusing on the dichotomy between the "haves" and "have-nots" within the market. The "haves" represent large corporations, particularly those unofficially categorized under the umbrella of "tech," which encompasses mega-cap companies not formally classified as Tech. Conversely, the "have-nots" encompass all other companies, humorously dubbed the "S&P 493" to distinguish them from the widely discussed "Magnificent 7."

However, this perspective provides only a simplified view of the market dynamics. It fails to capture crucial nuances, such as the significant underperformance of certain companies like Tesla and Apple in 2024, despite being considered part of the "Magnificent 7." These companies have faced notable declines, while the broader market has seen positive returns. Nonetheless, extreme market concentration remains a defining characteristic of the US equity market, with Tesla and Apple's struggles potentially exacerbating this concentration. Instead, the market rally heavily relies on a select few companies, including Nvidia, Microsoft, Meta, Alphabet, and Amazon.

A positive interpretation of extreme market concentration suggests that there may still be room for the rally to broaden, offering opportunities for a broader range of companies to partake in the AI gold rush. However, a more cautious perspective raises concerns that this broadening may be less probable if the economy encounters headwinds. This scenario would leave the market overly reliant on a small number of companies that have already experienced significant valuation increases or sharp rallies.

Despite the market's resilient performance, sentiment indicators are sounding cautionary alarms across various surveys. For instance, in the AAII survey, the ratio of bulls to bears is nearing levels that were not observed in over a decade. This surge in bullish sentiment is noteworthy for its stark absence of bearish sentiment, a trend that mirrors the prolonged period of market gains and subdued volatility. While these contrarian indicators have historically been reliable predictors of market corrections, they do not guarantee an immediate downturn. Nonetheless, they suggest that the market's upward trajectory could encounter obstacles, particularly in the face of adverse news or if an earlier-than-expected "Sell in May and Go Away" sentiment gains traction.

The enigma

Finally, as I sit in this same chair and gaze at my reflection on the computer screen each week, I find myself pondering the enigma of this ongoing market rally amidst a backdrop of recalibrated expectations surrounding this year's interest rate trajectory and notable shifts in bond yields during the first quarter. Despite a formidable rally in the previous quarter, yields on two-year Treasuries climbed nearly 40 basis points overall, settling near 4.6% by the end of the quarter. Similarly, 10-year yields saw an upward trend, increasing by more than 20 basis points to approximately 4.2%.

What's particularly intriguing is how equities remained remarkably resilient throughout the quarter, even in the face of rising bond yields. Despite the initial optimism sparked by the Federal Reserve's policy pivot in the fourth quarter, stocks demonstrated stability amid a less favourable rate outlook. Take, for instance, the MSCI World Index, which surged by over 9% in the final quarter of the previous year. Remarkably, it appeared to have nearly replicated that performance in the first quarter of the current year, showcasing its resilience to the shifting interest rate environment.

Oil markets

Oil prices surged by 16% in the latest quarter, signalling that export curbs by OPEC and its allies are effectively reining in global supplies. West Texas Intermediate (WTI) futures closed above $83 a barrel on Friday, marking the highest settlement in over a week. This price surge has been accompanied by a shift in market structure from bearish contango to bullish backwardation, indicating a tightening physical market.

The OPEC+ alliance's decision to extend daily supply cuts of approximately 2 million barrels through the end of June has bolstered expectations of reducing global stockpiles.

Furthermore, geopolitical tensions in the Middle East and Ukraine's drone strikes on Russian energy infrastructure have added to supply concerns, contributing to the upward pressure on prices.

Despite these supply-side factors, the US witnessed strong advances in key gauges of economic activity on Thursday, suggesting healthy growth. However, this positive economic momentum was somewhat tempered by increased domestic crude and gasoline stockpiles, which has partially offset the supply tightness observed in global markets.

It's been a hot topic among traders lately, especially after JP Morgan analysts released a note that garnered significant attention. The discussion revolves around the possibility of oil prices hitting triple digits, something many were quietly considering but hesitant to voice aloud. If Brent crude were to reach such heights by September, it would mark the first time in two years.

The driving force behind this potential surge is Moscow's decision to cut production in the coming quarter further, purportedly aimed at impacting Biden's reelection prospects. This move stems from Moscow's displeasure with Biden's support for Ukraine in the ongoing conflict. Despite objections from the US regarding Ukraine's drone attacks on Russian oil infrastructure, Moscow sees this as an opportunity to exert pressure on Biden, who already faces a challenging reelection battle this year. With petrol prices already on the rise, increasing by almost 15 percent this year to around $3.50 a gallon, the situation could spell double trouble for Biden and further escalate tensions in the energy market.

Weekend news

The manufacturing sector in China exhibited signs of stabilization and growth in March, marking the first expansion since September. According to the National Bureau of Statistics, the official manufacturing Purchasing Managers' Index (PMI) increased to 50.8 from 49.1 in February. This surpassed the median forecast of 50.1 by economists surveyed by Bloomberg and represented the highest reading since March of the previous year.