Summary: Despite an expensive market, economic risks are falling. Stay invested.
Risks have reduced in the last quarter. The Economic Cycle model is showing that Economic Expansion conditions are accelerating and Late Cycle conditions are no longer the dominant force. It is hard to know how long this Economic Expansion phase can retain its strength, but we are now likely looking at a second wind for the US economic cycle. The Recession Probability model has actually decreased, a very positive signal. Economic momentum is positive, and despite the market near all-time valuation highs, we recommend remaining invested, albeit cautiously. We do not believe portfolio leverage would be wise in light of high market valuations, but a move to cash would be too early.
The economic cycle is showing accelerated Economic Expansion phase conditions, implying momentum is clearly continuing.
Recession probability has taken a large step down to 37% from 43% in the prior quarter. In the past, recessions have occurred with at least 70% probability of recession on our model.
Market valuation, as measured by the Wilshire 5000 All Cap index divided by GDP is near all time highs making the risk-reward of investment in the market index a weak proposition. This would suggest any long investments made must come with a strong thesis. Portfolio leverage is NOT advised.
Liquidity based Economic Leading indicators are not currently supportive of the forward outlook for US PMI (economic strength), and risk assets are clearly currently benefiting from economic momentum (as seen above), however as this slows, the negative impacts of decreasing market liquidity will start to become more obvious.
Our stop-loss tool (global market breadth index) has not yet triggered a sell signal.
www.RecessionProtect.com is an organization formed to bring simple, back-tested & rules-based economic analysis to the mass market. No extra fluff.
GameStop’s stock rises in early deals, set for second best week
(Reuters) – Shares of GameStop Corp jumped 10.6% in early deals on Friday, as retail investors pushed up the stock in a renewed rally that could see it clock its second best week.
Options market activity in the stock, which has returned to the top of the lists in a social media driven retail trading frenzy, suggested investors were betting on higher prices or higher volatility, or both.
GameStop shares touched $120.09 in premarket trading. Its shares are set to triple this week, if gains hold. Further support could come from holders of options on the GameStop stock, as a big batch of those weekly contracts mature on Friday.
The stock is still some distance away from the $483 hit in January as battered hedge funds that had bet against the video game retailer were forced to cover short positions when individual investors using Robinhood and other trading apps pushed the stock higher.
Refinitiv data on options showed retail investors have been buying deep out-of-the-money call options, which are options with contract prices to buy or sell far from current prices.
Many of those options deals are set to expire on Feb. 26, and would mean handsome gains for those betting on a further rise in GameStop’s stock price.
Call options which would be profitable for holders if GameStop shares reach $200 and $800 this week have been particularly heavily traded, the data showed.
Meanwhile, GameStop’s Frankfurt listing shed 21.3% to trade at 98.19 euros, in a move that almost entirely saw its value converge with that of the U.S.-listed stock, which added nearly a fifth in value on Thursday.
(Reporting by Aaron Saldanha in Bengaluru; Editing by Shinjini Ganguli)
Sterling knocked back by bond rout
By Joice Alves
LONDON (Reuters) – Sterling fell against a stronger dollar on Friday, retreating from a three-year high touched earlier this week, as a rout in global bond markets sent yields flying and hurt the pound.
The pound has strengthened about 2% this year against the dollar and the euro as traders expect Britain’s speedy vaccine roll-out will help the economy rebound from its biggest contraction in 300 years.
Analysts attributed sterling’s fall on Friday to the sell-off in bond markets.
Benchmark U.S. Treasury yields vaulted to their highest since the pandemic began, driven by the prospect of accelerating growth and inflation that could trigger a faster rise in interest rates than many expect. Gilt yields also rose sharply on Thursday.
After rising above $1.42 for the first time in three years earlier this week, the pound fell to $1.3901 at 0803 GMT, its lowest since Feb. 18. It was 0.4% lower at $1.3957 at 0937 GMT <GBP=D3.
Versus the euro, it fell 0.1% 87.01, after hitting a 10-day low of 87.30 pence in earlier trading..
“The aggressive cable capitulation has seen macro and leveraged players retreating from an increasingly overbought market,” said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets. “The correction came as the UK curve 2-10 flattened by 2bp yesterday and short sterling rallied into the close.”
Analysts expected further short-term weakness, but in the long term the outlook will remain positive.
“Sterling may be correcting from over-bought extremes, but provided we do not subside through $1.3840 support we would use the correction to provide better levels to enter,” Stretch said.
Stock markets roiled by global bond whiplash
By Tom Arnold and Wayne Cole
LONDON (Reuters) – Global stocks fell on Friday, with Asian shares down by the most in nine months, as a rout in global bond markets sent yields flying and spooked investors amid fears the heavy losses suffered could trigger distressed selling in other assets.
MSCI’s Emerging Markets equity index suffered its biggest daily drop in nearly 10 months and was 2.7% lower, while European shares opened in the red, with the STOXX 600 down 0.7%, recovering from heavier losses earlier in the session.
The MSCI world equity index, which tracks shares in 50 countries, was 0.9% lower and heading for its worst week in a month.
Asia saw the heaviest selling, with MSCI’s broadest index of Asia-Pacific shares outside Japan sliding more than 3% to a one-month low, its steepest one-day percentage loss since May 2020.
For the week the index is down more than 5%, its worst weekly showing since March last year when the coronavirus pandemic had sparked fears of a global recession.
“It is not the beginning of a correction in equities, more a logical consolidation as price to earnings ratios were excessive,” said Francois Savary, chief investment officer at Swiss wealth manager Prime Partners.
“What is reassuring is that Q4 2020 earnings were good and earnings per share suprisingly good and that means down the road we should get back to growth.”
Friday’s carnage was triggered by a whiplash in bonds.
The scale of the sell-off prompted Australia’s central bank to launch a surprise bond buying operation to try and staunch the bleeding.
The European Central Bank is monitoring the recent surge in government bond borrowing costs but will not try to control the yield curve, ECB chief economist Philip Lane told a Spanish newspaper.
On Friday 10-year German government bond yields were down nearly 4 basis points at -0.267% and French and Austrian bonds were back in negative territory.
Yields on the 10-year Treasury note eased back to 1.4530% from a one-year high of 1.614% on Thursday.
“Bond yields could still go higher in the short term though as bond selling begets more bond selling,” said Shane Oliver, head of investment strategy at AMP.
“The longer this continues the greater the risk of a more severe correction in share markets if earnings upgrades struggle to keep up with the rise in bond yields.”
Markets were hedging the risk of an earlier rate hike from the Federal Reserve, even though officials this week vowed any move was long in the future.
Fed fund futures are now almost fully priced for a rise to 0.25% by January 2023, while Eurodollars have it discounted for June 2022.
Even the thought of an eventual end to super-cheap money sent shivers through global stock markets, which have been regularly hitting record highs and stretching valuations.
“The fixed income rout is shifting into a more lethal phase for risky assets,” says Damien McColough, Westpac’s head of rates strategy.
“The rise in yields has long been mostly seen as a story of improving growth expectations, if anything padding risky assets, but the overnight move notably included a steep lift in real rates and a bringing forward of Fed lift-off expectations.”
Japan’s Nikkei shed 4%, its biggest single-day fall since April, and Chinese blue chips joined the retreat with a drop of 2.4%.
Overnight, the Dow fell 1.75%, while the S&P 500 lost 2.45% and the Nasdaq 3.52%, the biggest decline in almost four months for the tech-heavy index.
Tech darlings all suffered, with Apple Inc, Tesla Inc, Amazon.com Inc, NVIDIA Corp and Microsoft Corp the biggest drags.
All of that elevated the importance of U.S. personal consumption data due later on Friday, which includes one of the Fed’s favoured inflation measures.
Core inflation is actually expected to dip to 1.4% in January, which could help calm market angst, but any upside surprise would likely accelerate the bond rout.
The surge in Treasury yields caused ructions in emerging markets, which feared the better returns on offer in the United States might attract funds away.
Currencies favoured for leveraged carry trades all suffered, including the Brazil real, Turkish lira and South African rand.
The flows helped nudge the U.S. dollar up more broadly, with the dollar index rising to 90.390. It also gained on the low-yielding yen, briefly reaching the highest since September at 106.42. The euro eased a touch to $1.2144.
The jump in yields has tarnished gold, which offers no fixed return, and dragged it down 0.1% to $1,767.81 per ounce, having earlier fallen to its lowest since June 26.
Oil prices dropped on a higher dollar and expectations of more supply.[O/R]
U.S. crude fell 1.5% to $62.57 per barrel and Brent also lost 1.3% to $66.02.
(Additional reporting by Swati Pandey in Sydney; Editing by Sam Holmes, William Maclean)
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GameStop’s stock rises in early deals, set for second best week
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