Post the correction in global equities there have been impressive rebounds from certain markets. The UK and European indices have been amongst the best performers with the FTSE and the DAX both ~10% above their recent lows. In Asia, the Japanese Index the Nikkei 225 has rallied 11% from lows. Surprisingly the U.S index, the S&P 500 is lagging offshore equivalents and is only 5% above its yearly lows.
In an attempt to drill down behind the S&P500’s underperformance a few issues spring to mind. Firstly, U.S Tech stocks led by some of the “Fangs” (Facebook, Amazon, Netflix and Google) suffered sharp falls earlier this year. Facebook lead the move lower as a result of the Cambridge Analytica scandal. That said, Facebook has now bounced 20% from its lows. Elsewhere, Apple and Amazon are trading back at or near to their January highs. Tech stocks do not appear to be the driving force behind the S&P 500’s current underperformance.
Q1 2018 earnings season in the U.S, confirmed corporate profits remain robust. In terms of earnings, FactSet recently reported that 79% of S&P500 companies had reported actual EPS (earnings per share) above estimates. This is the highest percentage of companies to do so, since FactSet began tracking this data in 2008.
In an attempt to drill down behind the S&P500’s underperformance a few issues spring to mind. Firstly, U.S Tech stocks led by some of the “Fangs” (Facebook, Amazon, Netflix and Google) suffered sharp falls earlier this year. Facebook lead the move lower as a result of the Cambridge Analytica scandal. That said, Facebook has now bounced 20% from its lows. Elsewhere, Apple and Amazon are trading back at or near to their January highs. Tech stocks do not appear to be the driving force behind the S&P 500’s current underperformance.
Q1 2018 earnings season in the U.S, confirmed corporate profits remain robust. In terms of earnings, FactSet recently reported that 79% of S&P500 companies had reported actual EPS (earnings per share) above estimates. This is the highest percentage of companies to do so, since FactSet began tracking this data in 2008.
Attention then turns to possible external factors, including Interest Rates and the US Dollar.
Interest rates in the U.S have moved steadily higher in recent months. U.S 2 Year Treasury Notes which started the year near 1.88%, last closed at 2.50%. Rising interest rates, have a far reaching impact. From reducing the amount of incomes consumers and business have to spend, to influencing investment allocation decisions to reducing the earnings of stocks. That said, rising interest rates in an environment where growth remains buoyant is usually only a mild headwind for stocks. More so given interest rates are rising from extremely low levels.
Perhaps the more important reason behind the S&P500’s underperformance is the recent rise in the U.S Dollar. As can be seen in Chart 1, the U.S Dollar historically trades in the same direction to that of U.S Interest rates. However, in November of last year there was a dislocation between this relationship during which the U.S Dollar fell despite rising U.S interest rates. In mid-April of this year, the positive correlation between the U.S Dollar and Interest Rates returned. The U.S Dollar has now rallied just under 4% in recent weeks.
From a technical perspective, the chart confirms the S&P500 bounced last week from the 200day moving average as well as the area of long term trendline support ~2600 area (chart 2). As a result, there is certainly a temptation to think that should the S&P500 now break above the 2725 resistance it has the potential to move higher.
Countering the bullish view is the month of May is traditionally one of the weakest for U.S equities. With the U.S Federal Reserve in a tightening cycle, U.S interest rates may have further still to rise. Additionally, post the recoupling of interest rates and the U.S dollar the feeling is the S&P500 will continue to underperform the likes of the DAX, FTSE and the Nikkei. My preference is to remain patient and should the S&P 500 dip into the 2500/2460 region it is an area I am interested in building longs.
Source Tradingview. The figures stated are as of the 7th of May 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
DISCLAIMER
TECHFX TRADERS PTY LTD (ACN 617 797 645) is an Authorised Representative (001255204) of KP International Group Pty Ltd (ABN 88 134 818 170 | AFSL No. 334191). The information contained in this report is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. This report is intended solely for the information of the person to whom it is provided by TECHFX TRADERS, and has been prepared without taking into account your particular circumstances and needs. The information in this report should not be taken as constituting or relied upon as being personal financial product advice. Although every effort has been made to verify the accuracy of the information contained in this website, TECHFX TRADERS, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained on this website or any loss or damage suffered by any person directly or indirectly through relying on this information. Opinions constitute TECHFX TRADERS’s judgement at the time of issue and are subject to change. Past performance is not a reliable indicator of future performance. TECHFX TRADERS owns copyright in the information and material provided contained on this website. Information may be printed or downloaded for personal use. The information may not otherwise be reproduced and must not be distributed or transmitted to any other person
Wholesale client
By signing up to TECHFX TRADERS you acknowledge that you are a wholesale client as defined in at least one of the below criteria
What is a wholesale client?
High Net Worth Investor
A person or entity who has either: a) Net assets of $2.5 million or more; or b) A gross annual income of $250,000 or more for each of the last two financial years. To apply under this category, a qualified accountant must certify that the person or entity satisfies this criteria and the certification must be no more than six months old.
Professional Investor
A person or entity who: a) Has or controls gross assets of at least $10 million (this may include funds held by an associate or under trust); b) Holds an Australian financial services licence; c) Is a body regulated by APRA other than a trustee of any of the following within the meaning of the Superannuation Industry (Supervision) Act 1993: (i) A superannuation fund; (ii) An approved deposit fund; (iii) A pooled superannuation trust; or (iv) A public sector superannuation scheme; d) Is a body registered under the Financial Corporations Act 1974; e) Is the trustee of: (i) A Superannuation fund; or (ii) An approved deposit fund; or (iii) A pooled Superannuation trust; or (iv) A public sector superannuation scheme within the meaning of the Superannuation Industry (Supervision) Act 1993 and the fund, trust or scheme has net assets of the least $10 million; f) Is a listed entity or related body corporate of a listed entity; g) Is an exempt public authority; h) Is a body corporate or an unincorporated body that: (i) Carries on a business of investment in financial products, interests in land or other investment; and (ii) For those purposes, invests funds received (directly or indirectly) following an offer or invitation to the public within the meaning of Section 82 of the Corporations Act 2001 (Cth), the terms of which provided for the funds subscribed to be invested for those purposes; i) Is a foreign entity that, if established or incorporated in Australia, would be covered by one of the preceding paragraphs. To apply under this category, a Professional Investor Declaration form must be completed and supporting evidence that you meet the criteria must be provided. (Only one of the above paragraphs need apply).
Large Business
Being a business that employs not less than: a) 100 people if the business is or includes the manufacture of goods; or b) 20 people in all other cases. To apply under this category, supporting evidence that you meet the criteria must be provided.
Significant Investor
A person or entity who invests at least $500,000 in any one opportunity and the minimum investment amount is $500,000.
Section 761GA Investor – Sophisticated Investor
A person or entity who is receiving a financial product or service not in connection with a business and meets the criteria contained in Section 761GA of the Corporations Act 2001 (Cth) as set out below: a) The financial product being provided is not a general insurance product, a superannuation product or an RSA product; b) The person or entity has established that it has previous experience in using financial services and investing in financial products that enables it to assess: (i) The merits of the product or service; and (ii) The value of the product or service; and (iii) The risks allocated with holding the product; and (iv) The client’s own information needs; and (v) The adequacy of the information given by the licensee and the product issuer. To apply under this category, sufficient evidence must be provided to satisfy GFIN Financial Solutions and an acknowledgement pursuant to Section 761GA(f) of the Corporations Act 2001 (Cth) must be provided once GFIN Financial Solutions is satisfied that you meet the requirements.
or used in any way without the express approval of TECHFX TRADERS.
