Long shadow cast over investor sentiment
SOMETIMES you don’t always get what you wish for, but you have to take what you get.

The market is in a strange place. Investors want to see a robust economy which can support strong corporate earnings, but a weak job market which could portend falling demand and release pressure on prices.

They got one wish, but not the other.

It was a roller-coaster ride on the markets last week.

Cruising into mid-week, Minneapolis Fed president Neel Kashkari threw a wrench into sentiment by saying there might not be any US Federal Reserve (Fed) rate cuts in 2024.

Kashkari’s remarks sent the S&P 500 spinning into its largest decline in nearly two months on April 4. The Dow Jones plumbed 500 points.

This came even as the market was becoming increasingly nervous on the back of oil prices surging past US$90 a barrel last week, as tensions in the Middle East ratcheted up following Israel’s attack of an Iranian consulate in Syria, killing two top Iranian generals and other military officials.

All this happened even as there were already concerns in the background about another global supply-chain crunch developing amid the shutdown at the Suez Canal, the bridge collapse in Baltimore and restricted passage at the Panama.

As it usually does at times when global uncertainties rise, gold surged, hitting new records at above US$2,300 per ounce on the global market.

In Singapore, SPDR Goldshares ETF added 4.2% in US dollar terms, ending April 5 at US$211.60 a unit.

Then on April 5, all fears were cast aside as Wall Street and global markets recovered sharply.This despite higher-than-expected US jobs numbers, showing non-farm payroll numbers advanced 303,000 in March, way above market estimates of 200,000. But wages rose 0.3% for the month and 4.1% from a year ago, both in line with estimates. Unemployment fell to 3.8%.

The real message in the hot non-farm payroll numbers was that the US economy is nowhere close to a slowdown, much less a recession.

Wall Street surged despite the news.

But the 307-point gain at last Friday’s close was not enough to drag the Dow Jones into the black following a rocky week.

The Wall Street marquee index posted its worst week in 2024 as it lost 2.27% to a close at 38,904.04 points on April 5.

The broader S&P 500 fell 0.95% to 5,204.34 points during the period, while the Nasdaq lost 0.8% to 16,248.52 points.

In Singapore, the benchmark Straits Times Index had a choppy trading week as it bounced between 3,250 and 3,200 points, before closing at 3,218.26 for a 0.2% decline.

The 1.5% dividend payout boosted the benchmark’s total return by 0.3%, taking it to a marginal positive total return of 0.1%.

So what’s next for markets?

Going forward, the sustainability of the current bull market is highly dependent on the Fed’s ability to tamp down inflation without harming the United States, and global, economy.

According to market polls, the strong US jobs report on April 5 has reduced the probability of a Fed rate cut in June from more than 60% a month ago, to just above 50% now.

But expectations that the Fed will not cut at its June 12 meeting remain around 30% to 40%, as they were last week.

And expectations that the Fed will still not cut at the July 31 Federal Open Market Committee remain around 20% to 25%.

Fed chair Jerome Powell emphasised last week that the US central bank would assess incoming data before reducing rates.

More evidence needed

So, policymakers are waiting for more evidence of lower inflation to see if the pickup in key price gauges at the start of 2024 is a temporary blip on the path to the central bank’s 2% inflation goal or a sign that progress has stalled.But the Fed is aware that if disinflation is intact, it may have to cut rates even if economic data surprises on the upside for now.

This must happen as real interest rates are at 15-year highs after the most aggressive tightening in 40 years, and could hurt the economy, corporate earnings and consumer spending if they remain at these levels through 2024.The good news by April 5 was that sticky inflation and fears of delayed Fed rate cuts did not seriously dent markets, which continued to advance on the back of strong corporate earnings and resilient macro data.

But after rallying for some five months, is the market starting to look frothy? That really is the trillion-dollar question.

As I pointed out recently in this column, BCA Research’s MacroQuant’s equity score dipped below average for the first time in 12 months, and downgraded equities from “overweight” to “neutral” on a one to three-month horizon.

Despite the decline in the US equity score, MacroQuant’s infatuation with tech stocks continues. The model maintains a negative view on stocks over a 12-month horizon.

Hallmarks of a bubble

Well-known market bear Albert Edwards, who is the global strategist at Societe Generale, believes the market rally of the past five months shows all the hallmarks of a bubble.

But every time a smart strategist warns that things are looking toppish, the market seems to find a new top.

While rising US bond yields and higher oil prices could spoil the party, recent dovish signals from central banks and relatively robust fundamentals, including strong corporate and household balance sheets, suggest that risk assets can continue to perform.

Speaking to the Straits Times last week, Adam Reynolds, the chief executive of Saxo Capital Markets for Asia-Pacific, saw more upside to markets remaining intact as interest rates start pulling back during the second half, disinflation continued and the US economy powered ahead, fuelled by robust corporate earnings and consumer spending.

Market experts like Vasu Menon, managing director for investment strategy at OCBC Bank, see rate cuts coming, even if inflation remains sticky.

“Although inflation remains some way from the US central bank’s policy targets, major central banks have signalled that lowering rates would be appropriate this year if inflation cools further,” he said.

“After all, central banks are also concerned that if they delay rate cuts for too long, they may miscalculate and cause a recession, even if data in recent months continues to show a resilient US economy.”

Gradual cut

While policymakers are cautioning that any rate cut moves will be gradual, investors are betting on at least three quarter-point rate reductions in 2024 from the Fed, European Central Bank (ECB) and Bank of England (BoE), with odds favouring the first cuts by the Fed and ECB in June followed by the BoE in August.

Indeed, most analysts agree that the next big leg-up for markets will be when the Fed hints at its first rate cut in more than three years.

If that happens, there is a huge amount of liquidity on the sidelines (some US$6 trillion by most estimates) which could pivot towards equities and bonds. But when that will start happening, and in what volumes, is anyone’s guess at the moment.

Meanwhile, it would be wise to remain plugged into news flows and stay nimble on the markets. — The Straits Times/ANN

Ven Sreenivasan is a senior columnist at The Straits Times. The views expressed here are the writer’s own.
Markets
SOMETIMES you don’t always get what you wish for, but you have to take what you get.