Summary
Europe the macro and market 2023 surprise
Now lower inflation, stronger earnings growth, and 30% lower valuations than the US. But also is riskier, more cyclical, and more global. Exposed to the US slowdown and China’s reopening. Key whether current technical recession turns into a hard landing. A $10trn market cap region, led by UK, France, Germany, and banks. But ranges from deep-value Italy to tech-focused Holland. Luxury LVMH to tech ASML and SAP.
S&P 500 now up 20% from October lows
S&P 500 entered official bull market with a sharp rotation toward lagged small caps and cyclicals, as VIX volatility fell to 2-yr low. Safer-haven tech, bonds, dollar, gold all lagged. RBA and BoC surprised by hiking interest rates again. AAPL launched long-awaited AR/VR headset. GME plunged as CEO fired. And SEC escalated crypto crackdown. See our Q2 Outlook HERE. Video updates, twitter @laidler_ben.
Shipping markets underline growth concerns
Shipping moves 90% global trade, making a real time barometer. Dry bulk and container freight rates have plunged, highlighting still high growth risks. See MAERSKB.CO to ZIM.
Dollar stability may be enough relief
US dollar has staged a mini rally on debt ceiling and less dovish Fed. We see dollar stability ahead as relief to hard-pressed currencies like NOK and ZAR, commodities, and EM stocks.
Mortgage ‘handcuffs’ boost homebuilders
US housing market soaring mortgage rates and falling home prices. Yet stocks, Pulte (PHM) to DR Horton (DHI), up on less inventory.
Korea overdue for the big leagues
South Korea world’s 12th largest economy and an economic ‘miracle’. One world’s most tech-heavy markets, from Samsung (SMSN.L) to LG Display (LPL). Yet still ‘emerging’ by MSCI.
Crypto falls to near a 3-month low
BTC fell under $26,000 after long-awaited SEC suits against big exchanges Binance and COIN. Though with hopes for better medium term regulation clarity. SOL, ADA, MATIC, ATOM led weakness as now considered ‘securities’. UK FCA launching a crypto purchase ‘cooling off’ period. AAPL launching an AR/VR headset.
Some rare commodity market relief
Asset class saw some relief with the broader rotation to cyclicals, stable dollar, and oil’s gains after the surprise Saudi 1mbpd supply cut. Natgas rallied on the outlook for hotter US weather. Wheat boosted ag on disruption from Ukraine dam flooding. And industrial metals up on China policy stimulus outlook.
The week ahead: Fed, ECB, price, triple-witch
1) FOMC (Wed) new forecasts, and possible last hike. Comes after latest CPI (Tue).
2) ECB (Thu) and BoJ (Fri) also meeting.
3) Monthly China data dump, as rebound lacklustre.
4) US F&O ‘triple witching’ (Fri), start of treasury $1trn bond sales (Mon), plus ADBE, ORCL, KR results.
Our key views: A goldilocks moment
Markets boosted by resilient economic growth and gradually easing inflation pressure. We see a market recovery but with coming bumps in road. Coming slowdown hurts earnings. But low yields help valuations. Focus on cheap and defensive assets from healthcare to big tech. More cautious on cyclicals and banks.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | 0.34% | 1.73% | 2.20% |
| SPX500 | 0.39% | 4.24% | 11.96% |
| NASDAQ | 0.14% | 7.93% | 26.68% |
| UK100 | -0.59% | -2.48% | 1.48% |
| GER30 | -0.63% | 0.23% | 14.55% |
| JPN225 | 2.35% | 9.79% | 23.65% |
| HKG50 | 2.32% | -1.21% | -1.98% |
*Data accurate as of 12/06/2023
Market Views
S&P now up 20% from October lows
- The S&P 500 entered official bull market territory, with a sharp rotation toward lagged small caps and cyclicals, as VIX volatility fell to 2-yr low. Safer haven tech, bonds, dollar, gold all lagged. RBA and BoC surprised by hiking interest rates again. AAPL launched long-awaited AR/VR headset. GME plunged as CEO fired. And SEC escalated crypto crackdown.See our Q2 Outlook HERE.
Shipping markets underline growth concerns
- Shipping moves 90% of all global trade, making a real-time barometer. Both dry bulk and container shipping rates have plunged as supply-chains and goods demand normalize. Prices still pressured as China reopening disappointed, and US and European import demand below pre-pandemic.
- Been relief to inflation worries. But joins weak commodity prices, manufacturing PMIs, and China trade data in warning on global growth risks. Big shipping carriers from container-giants MAERSKB.CO and HLAG.DE to dry bulk leaders ZIM and SBLK are seeing a double hit of both lower prices and weaker volumes.
Dollar stability may be enough relief
- The US dollar has staged a mini rally the past six weeks. Catalysed by safer haven demand around the US debt ceiling drama. And extended by the outlook for a less dovish Fed with sticky inflation and last Wednesday’s BoC hike. This has also happened as Europe’s inflation surprised lower and its technical recession dampened the ECB hiking outlook. The dollar is supported for now.
- But without drivers for a sustained breakout rally, and a still pricey valuation. Longer term we see modest weakness. Stability is enough to give relief to hard-pressed currencies, from NOK to the ZAR, and some support to US tech, commodities, and global-focused EU and Japan equities.
Mortgage ‘handcuffs’ boost homebuilders
- US housing market seen soaring mortgage rates and falling home prices. Yet homebuilder stocks, from Pulte (PHM) to DR Horton (DHI), have been some of the best performers this year. Limited inventory of existing homes is driving demand for new homes and for their homebuilders. Existing owners are being handcuffed from selling by cheap legacy fixed rate mortgages. Whilst demographics still drives steady first-home demand.
- This a market anomaly, as broader indicators from residential REITs (AVB), to infrastructure (PAVE), and lumber not enjoyed such strength. But sector likely seen worst as interest rates approach peak levels with the economy still very resilient.
Korea overdue for the big leagues
- South Korea is world’s 12th largest economy and an economic ‘miracle’. Tripling in size last 20 years and taking GDP/head to $33,000. It’s one of world’s most tech-heavy markets, from Samsung (SMSN.L) to LG Display (LPL). Yet still ‘emerging’ by MSCI.
- World’s most influential index provider considering an overdue upgrade to ‘developed’ market status. Would drive inflows from $10trn global tracker industry into market (EWY) and Won.
Global Dry Bulk and Container Freight rate index
Crypto prices falls to near a 3-month low
- Crypto assets pressured lower, and BTC under $26,000, by long-awaited SEC lawsuits against exchanges Binance and Coinbase (COIN). Though with some hopes that this could lead to improved US regulatory clarity in the medium term.
- An estimated 67 crypto currencies are now considered securities by the SEC. With SOL, ADA, MATIC, and ATOM all included in the most recent suits, and leading price falls last week.
- UK FCA introducing a 24-hour cooling off period for some crypto purchases. Apple (AAPL) launched AR/VR headset in a metaverse boost.
Some rare commodity market relief
- Commodities had a better week, helped by the broader rotation to cyclical assets and a more stable US dollar. But broad BCom index remains – 10% this year, the worst of all major asset classes.
- Brent crude stabilised after Saudis’ surprise 1mbpd supply cut out of the OPEC+ meeting. But many had hoped for a stronger price reaction. US natgas rallied off recent lows on expectations for warmer summer weather, and cooling demand.
- Wheat boosted ag prices as Ukraine dam damage flooding stoked fear of a hit to global supplies. The country supplies c10% of global wheat.
- Industrial metals rose on hope for government support to the key China property sector.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | -0.64% | 9.85% | 33.17% |
| Healthcare | -0.04% | -1.51% | -3.16% |
| C Cyclicals | 2.21% | 6.34% | 20.68% |
| Small Caps | 1.90% | 6.63% | 5.93% |
| Value | 0.92% | 1.27% | -1.58% |
| Bitcoin | -2.92% | -4.59% | 59.81% |
| Ethereum | -3.78% | -0.79% | 53.56% |
Source: Refinitiv, MSCI, FTSE Russell
The week ahead: Fed, ECB, inflation, triple-witch
- Market divided if FOMC will hike a 11th and final time, by 0.25% to 5.25% (Wed). Also publish new interest rate and macro forecasts. Much depends on May inflation (Tue), with Core est. at flat 5.4%.
- Other banks in spotlight after last week RBA and BoC surprise. ECB est. raising 0.25% to 4.0%, in 8th hike. Whilst BoJ and new governor Ueda seen unchanged as inch to tightening ultra-loose policy.
- Monthly China data dump of retail sales (est. 12%), industrial production (est. +5%), and fixed investment, as market waits for more government stimulus to support the reopening rebound.
- Friday’s ‘triple-witching’ US futures and options expiry one of biggest volume days of year. ADBE, ORCL, JBL, KR, LEN results. US Treasury starts c$1 trillion post debt-deal bond issuance plan (Mon).
Our key views: A goldilocks moment
- Markets being boosted by combination of resilient economic growth, helping earnings, and slowly easing inflation, helping valuations. The economic slowdown is still coming on impacted of lagged 5% rates impact, less lending, and spending cuts.
- See a V-shaped market recovery with plenty bumps in road. Faster slowdown hurts earnings. But lower bond yields helps valuation. Focus on cheaper and more recession defensive assets, from healthcare to derated big tech. More cautious on assets most exposed to recession risk, like cyclicals, small caps, and commodities. Or lower yields, like banks.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | 1.14% | -0.22% | -10.50% |
| Brent Oil | 0.97% | -0.51% | -12.73% |
| Gold Spot | -0.97% | -2.21% | 7.96% |
| DXY USD | -0.44% | 0.85% | 0.03% |
| EUR/USD | 0.37% | -0.95% | 0.44% |
| US 10Yr Yld | 4.29 | 27.42 | -13.72 |
| VIX Vol. | -5.27% | -18.79% | -36.18% |
Source: Refinitiv. * Broad Bloomberg index. * Basis point
Focus of Week: US debt ceiling deal relief
Europe been one of the biggest economic and stock market upside surprises of 2023
Europe been the performance surprise of 2023. A less-bad economic outlook, with plunged natgas prices and China’s reopening, driven earnings relief and combined with already low valuations. The sustainability of rally is dependent on whether current soft-landing turns harder, and overwhelms the FX, fiscal spending and China reopening buffers. Its stocks remain some of the world’s most globalised. @EuropeEconomy.
Europe is different from other regions – it’s cheaper than many, more cyclical, and more global
The regions diverse markets share three characteristics. Cheaper: On 12x prospective P/E, a 30% discount to US. This reflects the lack of tech stocks but also more challenged growth. Cyclical: GDP growth is lower than US and more globally dependent. Its stock index composition is more cyclical, and companies have lower profit margins. Global: 50% of European revenues come from abroad, making it a global barometer, and sensitive to FX trends. By comparison US and Chinese sales abroad are only 30% and 10% respectively.
Outperformance will be decided on whether current technical recession turns into a hard landing
Europe is in a technical recession, after two quarters of modest -0.1% GDP weakness. This slowdown likely continues as US growth downshifts and the lagged effect of the ECB’s rate hikes impacts. China’s reopening is positive wild-card. It’s a major market for many, like German industrials and French luxury. Whether this goes from a soft to a hard economic landing is THE question. Buffers are fiscal spending and weak Euro.
A $10 trillion market cap, with banks the biggest sector, led by UK, France, Switzerland, Germany
The free-float market cap of Europe’s main markets is $10 trillion. The UK (FTSE 100), France (CAC 40), Switzerland (SMI), Germany (DAX) the big four markets, with Netherlands (AEX), Italy (FTSE MIB), and Spain (IBEX) behind. Financials is the biggest sector at c22%, followed by health care and industrials. Tech and communications have a combined weighting of only 11%. Euro Stoxx 50 (EUSTX50) and 600 indices are the pan-continent bellwethers. Its largest stocks are ASML (ASML), LVMH (MC.PA), Total (TTE.PA), and SAP (SAP).
Every market is different. From Italy’s deep-value to Holland’s tech-focus
UK is focused on cheap financials and commodities, with 65% sales from overseas. Italy is one of world’s cheapest markets, led by financials, industrials (no.3 automaker Stellantis) but also a dose of luxury (Ferrari). Norway is more commodities (Equinor to Norsk). Holland Europe’s tech play (ASML to Adyen). France a luxury powerhouse (LVMH to Hermes). Switzerland 60% defensive healthcare and staples stocks.
Equity market prospective P/E valuation ratio (x)
Key Views
| The eToro Market Strategy View | |
| Global Overview | Aggressive Fed interest rate hiking cycle, stubborn inflation, financial sector and debt ceiling concerns accelerating our 2023 view. Of a quicker GDP slowdown, lower inflation, and a peaking Fed interest rate cycle. Will pressure earnings further but also lower bond yields and take pressure off de-rated valuations. We are invested, believing Oct 2022 was the low, and focus on cheap and defensive assets for a faster ‘V-shaped’ market recovery.See our Q2 Outlook HERE |
| Traffic lights* | Equity Market Outlook |
| United States | World’s largest equity market (60% of total) seeing slowing but resilient GDP and earnings growth. Valuations led the rebound this year and are supported high company profitability and peaked bond yields. Focus on cash-flows defensives, like healthcare and high dividend. And Big-tech supported by defensive growth, cost cutting, and AI. See gradual ‘U-shaped’ rebound as inflation slowly falls and de-risks market and boosts tech and crypto appetite. |
| Europe & UK | Favour defensive and cheap UK (‘Economies not stock-markets’) and continental European equities. Recession risk easing with lower natgas prices and reopening China with high ‘buffers’ of rising fiscal spending (defence and refugees) and weak Euro (50%+ sales overseas). Even as ECB hikes aggressively. Equities cushioned by lack of big tech sector and 30% cheaper valuations vs US. Banks better capitalised and regulated but loans/GDP much higher. |
| Emerging Markets (EM) | China, Korea, Taiwan dominate EM (60% wt.), and more tech-centric than US. Positive China as economy reopens, supports property sector, eases tech regulation pressure. Valuations 30% cheaper than US and markets out of favour. Recovery helps global sectors from luxury to materials. EM needs weaker USD and peak US rates catalyst. |
| Other International (JP, AUS, CN) | Canada and Australia have benefitted from strong equity market weight in commodities and financials, as global growth resilient and bond yields risen. Now could be becoming headwinds. Japanese equities among worlds cheapest with own and China-proxy growth and governance improving but threats of tighter monetary policy and stronger Yen. |
| Traffic lights* | Equity Sector & Themes Outlook |
| Tech | ‘Tech’ sectors of IT, communications, consumer discretionary (Amazon, Tesla), dominate US and China. Expect better performance as 1) lower bond yields take pressure off valuations and 2) high profit margins and fortress balance sheets make defensive to recession risks. 2) Cost cuts and AI add to growth. ‘Disruptive’ tech much more vulnerable. |
| Defensives | More attractive as recession risks rising and bond yields have peaked. Consumer staples, utilities, (some) real estate attractive with defensive cash flows, less exposed to rising economic growth risks, and with robust dividends. Healthcare is the most attractive, with cheaper valuations, more growth, some rising cost protection. |
| Cyclicals | High risk cyclical sectors – like discretionary (autos, apparel, restaurants), industrials, energy, materials, and small caps – have cheap valuations, many with depressed earnings, and have been out-of-favour for many years. But they are significantly exposed to rising recession risks. Some especially cheap (energy) or see growth recovery (airlines). |
| Financials | Current stresses likely individual not systemic. Post GFC reforms boosted capital and size/speed of authority’s response. But outlook for 1) less GDP growth, 2) lower bond yields and interest rates, and 3) valuation sensitivity after recent surprises, worsens outlook. Insurance and Diversifieds (like Berkshire Hathaway) more defensive. |
| Themes | Dividends and buyback themes attractive with resilient cash flows, rising pay-outs, and investor search for defensives. Power of compounding dividends under-estimated, at up to 1/2 of total long-term return. Small caps pressured by rising recession risk. Secular growth of Renewables and Disruptive Tech investment themes. |
| Traffic lights* | Other Assets |
| Currencies | USD ‘wrecking ball’ driven by Fed interest rates and ‘safer-haven’ bid. DM currencies hurt by still low interest rates and struggling growth. Strong USD hurt EM, commodities, US foreign earners like tech. But helps big EU and Japan exporters. See a stabler USD outlook in 2023 as near top of the Fed cycle and global risks remain high. |
| Fixed Income | US 10-yr bond yields supported around 4% by higher Fed rate hike and stickier inflation expectations. Set to ease as recession risks slowly build and inflation expectations gradually fall. US has widespread to other market bond yields, and headwinds of high debt, poor demographics, and low productivity. 5% bill yields an attractive cash alternative. |
| Commodities | Strong USD and rising recession fears hit commodities. But still above average prices helped by GDP growth, ‘green’ industry demand, supply under-investment, recovering China, Russia supply crisis. Oil helped by slow return of OPEC+. But commodities not to repeat their 2021 and 2022 performance leadership. Gold benefits from safer haven demand. |
| Crypto | Potential ‘surpsise’ after dramatic and early asset class sell-off and later specific risk events from Luna to FTX. See long term asset class development with small size $1 trillion, correlations low, regulation growing, development/catalysts continuing – Ethereum merge to proof-of-stake and coming BTC halving. |
| *Methodology: | Our guide to where we see better risk-adjusted outlook. Not investment advice. |
| Positive | Overall positive view, and expected to outperform the asset class on a 12-month view. |
| Neutral | Overall neutral view, with elements of strength and weakness on a 12-month view |
| Cautious | Overall cautious view, and expected to underperform the asset class on a 12-month view |
Source: eToro
Analyst Team
| Global Analyst Team | |
| CIO | Gil Shapira |
| Global Markets Strategist | Ben Laidler |
| United States | Callie Cox |
| United Kingdom | Adam Vettese Mark Crouch Simon Peters |
| France | Antoine Fraysse Soulier David Derhy |
| Holland | Jean-Paul van Oudheusden |
| Italy | Gabriel Dabach |
| Iberia/LatAm | Javier Molina |
| Nordics |
Jakob Westh Christensen |
| Poland | Pawel Majtkowski |
| Romania | Bogdan Maioreanu |
| Asia | Nemo Qin Marco Ma |
| Australia | Josh Gilbert |
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