Overnight Headlines

*Mixed performance on Wall Street sees Asian stocks follow suit

*Macron more convincing than Le Pen in French TV debate

*Tesla rallies five per cent in after-hours post earnings

*DXY sits just above 100, USD/JPY is back on a 128 handle

US equities closed a very mixed bag with earnings season in full swing. Defensives beat cyclicals and value outperformed growth. The tech-heavy Nasdaq closed down 1.2%, the S&P500 ended down 0.1% and the Dow finished up 0.7%. Netflix fell 35% and its results soured investors on the sector more broadly. Asian markets are mixed, and futures show a modestly positive open.

USD eased back from cycle highs after initially climbing to 101.03. EUR rebounded to close higher at 1.0853 as French President Macron looked to be closing in on victory in Sunday’s vote. GBP also gained ground, bouncing off 1.30. USD/JPY rose to a fresh high at 129.40 before falling sharply to close at 127.88. AUD and NZD traded strongly. USD/CAD fell 0.93% on bumper CPI data.

Market Thoughts – Choppy markets, “peak inflation”

Sometimes, markets are tough to read as the usual correlations simply stop working. Recently, the moves in bond yields have not resulted in the usual stock market price action. By this we mean outperformance of banks and value cyclicals over growth. We alluded to this in the weekly preview.  In fact, it has resulted in the opposite. Tuesday saw higher yields and growth outperforming. Yesterday saw lower yields (especially in Europe) and banks outperforming.

A reason behind this disconnect is that yields have not been rising due to macro reasons, but monetary policy repricing and stagflation fears. That said, we are now also seeing more calls for “peak inflation”. Long bond yields fell sharply yesterday with rate expectations sharply repricing.

Chart of the Day – Stock market bulls have gone AWOL

A different chart today – one courtesy of the American Association of Individual Investors’ weekly survey and Bloomberg. This is a sentiment survey and shows optimism among individual investors falling to a level not seen in nearly 30 years. Bullish sentiment, that is expectations that stocks will rise over the next six months, is among the 10 lowest readings in the survey’s history, going back to 1987.

To put this into perspective, there were more bulls during the GFC in 2008 and during the Covid lockdown. Is this a signal to buy? Previous extremes have proved good short-term buying opportunities. But the small sample size does make this call perhaps one of luck than any strong judgement.