Developed Countries
So far, the US earnings season is generating positive surprises, with 79% of firms beating guidance. We cannot be naïve, though. The earnings and revenue numbers are poor, they are just better than the extremely negative guidance that companies provided ahead…
At the press conference following the FOMC decision, Fed Chair Powell reinforced the extremely dovish forward guidance of the Fed by asserting once again that the committee “is not thinking about thinking about raising rates”. He also highlighted that…
In June, US pending home sales continued their rebound, growing 16.6% after surging 44.3% in May. In level terms, pending home sales stand at a 14-year high. The rebound of pending home sales is symptomatic of the recovery in housing activity. This return…
Last week we put a 5% rolling stop on the long S&P homebuilding/short S&P REITs pair trade in order to protect profits. Yesterday, our stop got triggered and we crystalized 10.3% gains since the May 26 initiation date. A slew of better-than-expected homebuilder reports caused the recent spike in this market-neutral trade, confirming that all-time low mortgage rates have brought back residential real estate buyers with a vengeance. While most of the key catalysts for this intra-real estate pair trade remain in place that we first outlined in our late-May report, we obey our risk management metric and choose to move to the sidelines for now. Bottom Line: Lock in two-month gains of 10.3% in the long S&P homebuilding/short S&P REITs pair trade and step aside, but stay tuned. The ticker symbols for the stocks in the S&P homebuilding and S&P REITs indexes are: BLBG: S5HOME – LEN, PHM, NVR, DHI, and BLBG: S5REITS – AMT, PLD, CCI, EQIX, DLR, SBAC, PSA, AVB, EQR, WELL, ARE, O, SPG, ESS, WY, MAA, VTR, DRE, PEAK, BXP, EXR, UDR, HST, REG, IRM, VNO, FRT, AIV, KIM, SLG, respectively.
Neutral – Downgrade Alert There is trouble brewing for the S&P pharmaceuticals index as President Trump recently signed four executive orders geared toward lowering drug pricing for Americans. Trump is not the only one who is ready to fight Big Pharma. In recent research we also highlighted that Biden will be tough on pharma, especially on the industry’s pricing power. The implication is that irrespective of who the next President is, the S&P pharmaceuticals index will come under intense scrutiny. Consequently, we find the relative 4% year-over-year sales growth estimates overly optimistic (third panel). The sell-side community is also forecasting even more impressive relative EPS growth over the next 12 months. This is a tall order as double digit relative profit growth typically marks a peak in relative share price performance (second panel). Nevertheless there is a significant offset to the grim pharma selling price backdrop: compelling valuations. The forward P/E is trading at a nearly 40% discount to the broad market a multi decade low, even piercing through the GFC lows (bottom panel). Bottom Line: We remain neutral the S&P pharmaceuticals index, but it is now on our downgrade watch list.
Between October 2018 and May 2020, the US-German 10-year yield spread narrowed by 155 bps. This decline mostly reflected a faster fall in US yields than German ones. Since early May 2020, the spread has narrowed a further 14bps. This time, while US yields…
The Conference Board’s US consumer confidence for July declined significantly, from 98.6 to 92.6, driven by a sharp fall in its expectations component from 106.1 to 91.5. This poor reading is concerning as it points toward weaker consumer spending in the…
BCA Research's US Bond Strategy & US Investment Strategy services conclude that the Fed’s emergency lending facilities have successfully stabilized markets. Overall, the Fed’s response has been highly effective. Stability was restored to financial…
BCA Research's Global Fixed Income Strategy service recommends investors underweight German, French, the British, Swedish and Japanese sovereign markets versus the US in USD-hedged portfolios, because both their unhedged and USD-hedged yields are below…
The SPX started the week on the right foot, but we continue to recommend investors avoid chasing equities at this point. Two key risks we have flagged recently are: rising concentration risk of market leaders, and geopolitical-related risks. Today we highlight three additional sources of near-term stress for equity investors. The SPX has failed to outperform gold and a worrisome technical lower high formation has taken root warning of an overall market pullback (top panel). This is eerily similar to the trouble gold sniffed out early in the year, as we highlighted in our mid-January report. The bond market also disagrees with the SPX rally over the past six weeks, as long duration bond prices have been besting the broad equity market since the June 8 peak (middle panel). Tack on the flattening yield curve since then, and a plethora of warning signs reiterate our near-term cautious view (bottom panel). Bottom Line: While our cyclically sanguine broad equity market view remains intact, we are cautious on the short-term prospects of the S&P 500.