Global Economy & Markets, Weekly Roundup 23/05/23
Global equity markets have remained, so far, broadly unperturbed by the US debt ceiling impasse
Key Takeaways
Equity indices rose further in the past week, with the S&P500 up by +1.6%. Equity multiples are pricing-in a high probability of soft landing for the US economy, with the 12-month forward Price-to-Earnings ratio at 18.3x (+0.5% QtD) versus a 15-year average of 15.8x. Moreover, 12-month forward EPS expectations have risen by +1.5% QtD to $229 following better-than-expected results in Q1 earnings season, leading the S&P500 higher by +2%, so far, in Q2 (+9% year-to-date).
Despite the standoff over the US debt ceiling, option-implied volatility has subsided further. The VIX equity market volatility Index is trading at 17% versus a 1-year average of 23% (long-term average of 18%). Equally importantly, the MOVE bond market volatility index has also declined, albeit remains elevated.
Mega-cap technology companies (AAPL, MSFT, GOOGL, AMZN, META), which have collectively risen by +10% in Q2, have led the S&P500 higher, and their weight in the index has increased to 23% (peak of 25% in August 2020). Reflecting higher concentration and narrowing market breadth, the equal-weight S&P500 index has lagged its market-cap weight counterpart by -700 basis points since the collapse of Silicon Valley Bank.
Regarding the US debt ceiling, President Biden and Republican House Speaker McCarthy will continue their negotiations, following Monday’s unconclusive talks on how to raise the debt limit. Investors expect a last-minute deal, albeit with the X-date -- the date on which the US government will be unable to meet all its obligations -- approaching (June 1st), the risk of policy error and financial market disruption remains.
The US dollar has strengthened lately, as expectations that USD interest rates will remain higher for longer have increased due to resilient economic data and more hawkish rhetoric from top FOMC officials. Specifically, the US dollar hit a six-month high against the Japanese yen, increasing by +2.4% to 138.5 in the past week. In a similar vein, the US dollar appreciated against the EUR to 1.077 -- a two month high -- as of May 23rd.
On the other hand, market-implied expectations for euro policy interest rates have remained broadly unchanged, pointing to roughly additional hikes of +50 bps as economic activity has held up better than expected and euro area inflation continues to be too high (CPI: +7.0% year-over-year, Core CPI: +5.6% year-over-year).
The euro area composite PMI, released today, suggests that business output grew for the fifth consecutive month, pointing to positive real GDP growth rate in Q2.2023 from +0.1% quarter-over-quarter in Q1.2023. The rate of expansion moderated in May to 53.3 from 54.4 in April.
However, PMIs diverged further sector-wise in May, with the difference between the output index in the manufacturing sector (-2.3 pts to 46.3) and its services counterpart (-0.3 pts to 55.9) hitting its widest since January 2009, as new orders (demand) for goods have fallen significantly. Finally, selling prices in the services sector further increased in May, while prices charged for factory goods declined for the first time since September 2020, according to HCOB.
Key Takeaways
Equity indices rose further in the past week, with the S&P500 up by +1.6%. Equity multiples are pricing-in a high probability of soft landing for the US economy, with the 12-month forward Price-to-Earnings ratio at 18.3x (+0.5% QtD) versus a 15-year average of 15.8x. Moreover, 12-month forward EPS expectations have risen by +1.5% QtD to $229 following better-than-expected results in Q1 earnings season, leading the S&P500 higher by +2%, so far, in Q2 (+9% year-to-date).
Despite the standoff over the US debt ceiling, option-implied volatility has subsided further. The VIX equity market volatility Index is trading at 17% versus a 1-year average of 23% (long-term average of 18%). Equally importantly, the MOVE bond market volatility index has also declined, albeit remains elevated.
Mega-cap technology companies (AAPL, MSFT, GOOGL, AMZN, META), which have collectively risen by +10% in Q2, have led the S&P500 higher, and their weight in the index has increased to 23% (peak of 25% in August 2020). Reflecting higher concentration and narrowing market breadth, the equal-weight S&P500 index has lagged its market-cap weight counterpart by -700 basis points since the collapse of Silicon Valley Bank.
Regarding the US debt ceiling, President Biden and Republican House Speaker McCarthy will continue their negotiations, following Monday’s unconclusive talks on how to raise the debt limit. Investors expect a last-minute deal, albeit with the X-date -- the date on which the US government will be unable to meet all its obligations -- approaching (June 1st), the risk of policy error and financial market disruption remains.
The US dollar has strengthened lately, as expectations that USD interest rates will remain higher for longer have increased due to resilient economic data and more hawkish rhetoric from top FOMC officials. Specifically, the US dollar hit a six-month high against the Japanese yen, increasing by +2.4% to 138.5 in the past week. In a similar vein, the US dollar appreciated against the EUR to 1.077 -- a two month high -- as of May 23rd.
On the other hand, market-implied expectations for euro policy interest rates have remained broadly unchanged, pointing to roughly additional hikes of +50 bps as economic activity has held up better than expected and euro area inflation continues to be too high (CPI: +7.0% year-over-year, Core CPI: +5.6% year-over-year).
The euro area composite PMI, released today, suggests that business output grew for the fifth consecutive month, pointing to positive real GDP growth rate in Q2.2023 from +0.1% quarter-over-quarter in Q1.2023. The rate of expansion moderated in May to 53.3 from 54.4 in April.
However, PMIs diverged further sector-wise in May, with the difference between the output index in the manufacturing sector (-2.3 pts to 46.3) and its services counterpart (-0.3 pts to 55.9) hitting its widest since January 2009, as new orders (demand) for goods have fallen significantly. Finally, selling prices in the services sector further increased in May, while prices charged for factory goods declined for the first time since September 2020, according to HCOB.