The market-leading Nasdaq 100 fell as Treasury yields push higher ahead of next week's meeting of the Federal Open Market Committee. Canada’s central bank unexpectedly raised interest rates by 25 basis points, adding to market apprehension on what might come for US rates. Fed Fund futures trading puts just 36% odds of a rate hike on next week's meeting, up from 22% odds yesterday, leading to some profit taking in tech stocks.
TODAY’S MAJOR NEWS
Tech rally falters, market foundations suffer
My colleague’s John Kicklighter has highlighted the narrow market leadership in 2023. For example, the Dow Jones Industrial Average, the so-called ‘value index’, is largely unchanged from the beginning of the year, while the tech-heavy Nasdaq 100 The ‘growth index’ is up approximately 26 percent in 2023. While this made sense on fundamentals, with strong earnings and positive outlooks from a handful of companies – NVIDIA, Salesforce, Advanced Micro Devices, and Apple, to name a few – valuations have become stretched. Nvida, the AI darling, now valued at close to a trillion dollars, is now rated at a 70x forward PE.
We’ve been here before. The first great tech rally, the so-called ‘Dot-com’ bubble, saw a very similar market concentration and stratospheric ratings. The Nasdaq 100 rose 800% between 1995 and its peak in March 2000, with stocks averaging triple digit PE ratios. When valuations were clearly unsustainable, as interest rates began to rise, the Nasdaq 100 fell 740% from its peak to its trough in October 2002, giving up all its gains during the bubble. If there is a nagging fear amongst market pro’s it’s this: will a higher discount rate and weaker demand see history repeat itself?
Chinese exports slow and diversifies to new trading partners
Global realignment continues to impact trade, with very weak Chinese export numbers out today, with significant implications for China’s economy. The rapidly falling export pace was largely due to declining shipments to Europe and the US as those regions experience slowing economic growth, along with a trend toward diversifying sources for goods away from China due to rising geopolitical tension. To fill the gap, China’s trade with Russia and its new client states – the so-called “Belt and Road” countries in Africa, Asia and South America – grew dramatically. We are seeing both a slowing in the Chinese economy, and less reliance of that economy on traditional developed world partners, with significant implications for future global growth.
Bottom line – risk-hold
Financial markets are still risk-on as we look forward to next week’s Fed meeting.
TODAY’S MAJOR MARKETS
- The Nasdaq 100 and S&P 500 fell 1.2% and 0.4%, respectively, in morning trading, while the more broadly based Russell 2000 rose 1.6%
- The FTSE 100 and DAX were largely unchanged
- Canada’s S&P/TSX Composite Index fell 0.5% after the central bank’s unexpected rate rise
- The VIX, Wall Street’s fear index, was up a shade at 14.1
Currencies and Bonds
- The dollar index was unchanged against a basket of currencies this morning, at 104.1, after advancing last week
- Yields on 2- and 10-year Treasuries rose to 4.58% and 3.80%, respectively
- Gold prices fell 1.2% to $1,959 per ounce
- Crude oil prices rose 1.1% to $72.5 per barrel
- The grain and oilseed sector was mixed to weaker ahead of Friday’s USDA crop report. Wheat prices fell sharply today as Russia continues to dump cheap wheat on the world market
Chinese exports fall
- Chinese customs data showed today that its exports fell 7.5% year-on-year in May, exceeding an expected 0.4% decline
- Chinese imports of energy commodities rose in May, with crude oil imports up 12.3% year-on-year, and coal imports up 93% year-on-year, and liquified natural gas imports up 11.4%
- China’s trade with Europe fell 3.7% year-on-year in May, exceeding the 3.2% decline from January to April
- Trade with the US fell 12.3% year-on-year in May, versus a 11.2% decline in April
- Trade with Russia grew at a rapid 40.7% pace year-on-year in May, with exports rising 114.3%, and imports rising by 10.1%
- Chinese trade with “Belt and Road” countries is up 13.2% year-to-date, with exports up 21.6% and imports up 2.7%.
- Trade with the Association of Southeast Asian Nations grew 2.1% year-on-year in May, down from 5.6% growth in April