US S&P 500 Outperformance
The S&P 500 has been clearly outperforming a number of asset classes recently, especially when we look at the last 10 to 20 trading sessions.
Domestically, I find it particularly interesting that real estate equity is struggling to participate in the rally. XLRE, which is a real estate etf is down 1% in price since the middle of May while the S&P500 is up 5% during the same period.
US Housing data continues to come in weak as well with housing starts released this week down 5.5% in the month of May.
Internationally, both Chinese and German equity averages have underperformed US equities by some 9% and 7% respectively in the last month which is fairly significant. The Chinese underperformance has caught us by surprise as the main index tests key support just below 3,000. Domestic data in China, including both growth and inflation have been weak, and it seems upside momentum requires the constant introduction of new stimulus measures which recently have been absent.
Over in Europe, political uncertainty over the upcoming French elections have led to some contagion in European assets despite the recent interest rate cut delivered by the ECB. We note this week’s French Bond auction was well cleared and the divergence between French and German yields in the long end have stabilized for the time being as has the Euro above the 1.0700 level.
Eur vs Chf FX
The Franc has depreciated roughly 0.5% against the Euro today and Swiss rates across the curve are down between 6-9 bps as the SNB delivers another rate cut, taking its key overnight rate down to 1.25%.
This is the second rate cut in an easing cycle that began back in March of this year. The impetus for the easing cycle had been a desire to weaken the extra-ordinarily strong Swiss Franc which has helped pushed the nation’s headline inflation rate to well below 2%.
The SNB is not “officially” underperforming on its mandate as the language states that inflation should be kept “below 2%” rather than “at 2%” like most other G10 central banks but still inflation near 1% can easily turn into outright deflation if not monitored carefully. Safe haven flows continue to pour into the Franc not withstanding the latest inflow from an uptick in European peripheral bond stress and in our opinion the SNB now needs to be more decisive in their FX reserve interventions in order to push the the Eur/Chf cross rate back above parity.
Latest FX reserve reports out of Switzerland show stability in foreign reserves after a recent build up to 716b, up from 642B, a level last seen in November of 2023. Now that the Eur/Chf cross rate has again tested levels below 0.9500, we expect the build up in foreign reserves to restart as the SNB seeks to support its latest rate cut and ensure it’s monetary policy transmission by stopping any further appreciation of the Swiss Franc. We now expect a gradual rise back towards the 0.9800 level.
Norwegian Kroner:
The Nok has appreciated 0.5% against the Euro today after the Norges Central Bank delivered a hawkish statement, clearly stating that it intends to hold policy rates at 4.5% at least for another 6 months while it waits for inflation to cool back down towards target. Regional activity surveys indicate rising activity in Norway, allowing the Norges to hold rates at restrictive levels for a while longer in order to get both headline inflation (currently at 3%) and core inflation (currently at 4.1%) down to more acceptable levels. Because the fight against inflation is occurring while activity remains firm, oil prices are rising and the ECB is cutting, a gently appreciating Norwegian Kroner should be the natural side affect of Norway’s current policy stance.
Technically speaking, Eur/Nok has begun to trade below a long standing consolidation pattern on the charts and a firm close under 11.30 would signal a quick move towards the 11.00 level where support resides from the 38.2 fibonacci retracement level, all else being equal.
As always we shall keep you posted here at Purity Macro.
Now onto Italy Vs Spain and Argentina vs Canada in the Euro 2024! I hope you enjoy it.
Bi for now. Ciao.
Disclaimer
The information provided in this post is for general use only and does not constitute a solicitation for investment. It should not be construed as professional financial advice. Seek independent professional consultation before making an investment decision.