Last week was another fairly dismal week for equities, with the volatility index, the Vix, advancing to close to its long-term average – the Vix hit 18.5 last week.
Among other equity benchmarks, the S&P Mid Cap 400 index was in the red, down 3%, the NASDAQ Composite, down 2.5% and our very own FTSE 250 index, down 1.9%. The S&P 500 also declined 1.6%; overall, the FTSE All-World index was down 1.2%.
In terms of gainers, gold was ahead 1.8% over the last week, while the OMX Nordic 40 was the only major equity index experiencing a gain of nearly 3%.
As an aside, I’d note that since President Trump’s formal election result on November 6th, the S&P 500 has been up 1.85%, while the S&P 400 Midcap has been down 5.6%.
As for the year-to-date returns, the German DAX index is the big winner, up 12%, closely followed by the Swiss Market index, up 11.9%.
In macro watching, the FOMC minutes revealed concerns that Donald Trump's trade and migration policies might fuel inflation, making inflationary risk a bigger worry than labour market deterioration. Several Fed officials suggested pausing or slowing the pace of shrinking the Fed's balance sheet until the debt ceiling is raised.
In Europe, concerns grew after ECB hawk Isabel Schnabel's comments on a possible end to rate cuts, leading to a rise in government bond yields. Ursula von der Leyen's suggestion to exclude defence spending from government deficits also contributed to the increase in yields. Germany's 10-year Bund yields rose to 2.55%.
In Japan, accelerating inflation and strong growth in Q4 2024 could prompt the Bank of Japan to raise rates. However, Governor Kazuo Ueda mentioned the possibility of resuming government bond purchases to prevent excessive currency appreciation. In the UK, unemployment remained at 4.4%, but overall inflation rose to 3% and underlying inflation to 3.7%. The Bank of England's governor remains confident that inflation will decrease this year.
Downside risks growing in the US
Regular readers will know by now that I spend a fair bit of time scanning the excellent Daily Shot macro updates, especially about what may happen to the all-important US economy. February has brought a steady stream of small signals that the US economy might be slowing down in terms of the pace of economic growth. These are only a few signals at the moment, mainly because most data points suggest the economy is remarkably resilient.
Let’s start with CONSUMER SENTIMENT. The University of Michigan’s updated consumer sentiment index showed further deterioration in the month's latter half.
Sticking with consumers, the Daily Shot also reports that consumer loan demand remains weak, and credit card demand has softened over the past two quarters.
Torsten Slok, chief economist at Apollo, the big US alternative assets shop, has also picked up these trends. Although he concedes that the incoming economic data remains “strong”, his firm is
“…starting to worry about the downside risks to the economy and markets from: 1) the impact of DOGE layoffs and contract cuts on jobless claims and 2) persistently elevated policy uncertainty weighing on capex spending decisions and hiring decisions. Specifically:
1) The consensus expects total DOGE-related job cuts to be 300,000, and the number of people filing for unemployment benefits has been rising in Washington, DC, but not in Virginia, Maryland, and Washington, DC combined, see the first two charts. Total employment in the United States is 160 million, with 7 million unemployed. Also, about 5 million people change jobs every month. In that context, 300,000 federal jobs lost is not much. However, studies show that for every federal employee, there are two contractors. As a result, layoffs could potentially be closer to 1 million. Any increase in layoffs will push jobless claims higher over the coming weeks, and such a rise in the unemployment rate is likely to have consequences for rates, equities, and credit.
2) Credit spreads have not responded the way they normally do to rising policy uncertainty. Economic policy uncertainty is spiking higher, but credit spreads are not widening, see the third chart. The question is if persistently elevated policy uncertainty will begin to have a negative impact on capex spending and hiring decisions.
The bottom line is that the incoming data remains strong. But the near-term downside risks to the economy and markets are growing.
It also probably won’t surprise veteran cynics and sceptics of the stock market that veteran permabear Albert Edwards, Chief strategist at French investment bank SocGen, has been reading the same runes and reckons he's spotted signs of a slowdown, focusing his attention on earnings updates.
“Notwithstanding the ‘blips’ from games played around reporting rounds, analyst optimism for the S&P 500 has been a series of lower highs and lower lows. Both the 6 and 12 month moving averages are now turning down.
“The slippage in analysts’ optimism is not a crisis in itself, but it likely indicates that the profits cycle is turning lower. This stands in stark contrast to some of the most closely watched macro cyclical indicators, such as the official Conference Board’s measure.
And the chart below is even more curious. While the most recent pace of US analyst optimism has slumped, a well-regarded leading indicator of the ISM manufacturing index has surged higher, i.e. new orders relative to inventories. Most strange indeed.
If US analyst optimism is turning downward might this be enough to pull the rug from under what many see as an extremely expensive equity market, flirting with all-time highs?
China Technology
You might have missed it, but Chinese tech stocks have been on a tear! One way to see this is to look at the SSE Information Technology Index, ticker SSEINT, which you can view HERE.
This benchmark bottomed out at around 2400 in September last year, then started moving markedly higher in the new year – starting January at 3513, before hitting its current 4359. As I write this, it's up 24% in the year to date. Last week, Bloomberg reported that the gains were led by Alibaba
“whose shares surged 15% after the Chinese e-commerce giant reported sales that beat estimates. Bilibili Inc. and Lenovo Group Ltd. shares also climbed on better-than-expected results. On the mainland, AI chipmaker Cambricon Technologies Corp. rose by the daily limit of 20% to a record high.
Chinese technology shares have been on a tear in recent weeks as local AI startup DeepSeek’s breakthrough prompted investors to re-evaluate the nation’s leading internet companies. The Hang Seng Tech Index entered a bull market earlier this month on enthusiasm over DeepSeek’s AI model. More recently, President Xi Jinping’s meeting with Alibaba founder Jack Ma and other tech executives spurred interpretations that Beijing is taking a more conciliatory tone in fostering the sector’s development.
“There remains great growth potential for Chinese technology shares, and the Hang Seng Tech Index may even see growth rates similar to Nasdaq’s in the near future,” said Zhou Nan, founder and investment director of Shenzhen Long Hui Fund Management Co. “Investor optimism is supported by DeepSeek’s AI model, solid fundamentals of tech companies, and a changing geopolitical landscape for China as Donald Trump adopts a tough stance toward US’s alliances,” he said.
“Alibaba’s shares are up 68% in Hong Kong this year. Its ADRs jumped 8.1% on Thursday after it reported sales that beat estimates, driven by the core Taobao and Tmall business as well as the closely watched cloud unit.”
Chen Zhao, Chief Global Strategist at US-based macro research firm Alpine Macro, reckons there’s more good news to come.
“Chinese tech stocks have massively underperformed their U.S. counterparts for an extended period, making their valuations notably compelling at this juncture. This is particularly so when earnings growth for Chinese tech companies has actually begun to exceed that for the U.S. tech index. Bottom line: We believe the surge in Chinese shares will likely continue, fueled by improvements in China’s economy, government policies, geopolitics, tech growth and valuation. However, Chinese equities are highly volatile. Investors looking to ride the rally should be prepared for sharp drawdowns and dramatic price swings. That said, the potential returns could be substantial within a 6-12 month horizon.”
Gold ETFs have missed out
I’ll finish with one final comment from one of my favourite contrarian strategists, Vincent Deluard, at US firm Stone X. Generally a fan of gold – as I am in asset allocation terms – Deluard observes that,
“Since COVID, Treasury ETFs have received a whopping $309 billion, bitcoin ETFs have attracted $55 billion, and TIPS funds $23 billion. Gold ETFs have received just $12 billion (or 0.9% of assets) despite rallying 88%. Flows into Asian-listed gold ETPs have been stronger, but the industry accounts for just 5% of European and US-listed gold ETP assets, so there is still plenty of room for more Asian buying. 20 years of studying fund flows have taught me that good things happen to assets that make consistent new highs amidst a general lack of retail interest. And vice versa for US Treasuries.”
