Poseidon Foresight - Global Market Wrap & Investment Ideas - 20240326

Global Macro

Last week marked the end of the Super Week for global central banks, where the median dot plot from the Fed for 2024 stayed the same, indicating three rate cuts this year.? Powell's comment that "a rate cut is appropriate at some point this year, and most officials remain confident about inflation reaching its 2% target“ was interpreted as dovish by the market - suggesting that the Fed can tolerate slightly higher-than-normal inflation levels for an extended period. This led to a renewed optimism in the US Equity, Credit, and FX markets, resembling sentiments seen in November last year. The market now began pricing in a June rate cut (with the probability increasing from 50% to 67%).

However, we still believe that 2 rate cuts in 2024 are more realistic. Observing from the dot plot, there are significant divisions within the Fed, with 10 of the 19 voting members predicting three cuts and 9 predicting two. Those favoring three cuts do not have an overwhelming advantage, yet this nuance has been overshadowed by the media. Furthermore, the so-called dovish stance is not based on a guarantee for the future, but rather a result of a lack of negative news for the Fed to address at present. Lastly, we have also observed a recovery in energy/commodity prices this month, casting doubt on Powell's comment that the inflationary surge in January and February was due to seasonal factors.

Consistent with our last week's write-up, global central banks are primarily influenced by the Fed at this stage. Therefore, following the Fed's dovish stance, the BOE has not ruled out the rate cut in May/June, while the SNB unexpectedly cut rates by 25bps, declaring victory against inflation and becoming the first G10 currency nation to do so. Meanwhile, Japan has exited its negative interest rate policy as speculated by the media. The market's main focus this week will be on the US PCE and Durable Goods reports.

US Equity

Both major US stock indices rallied for 5 consecutive days last week, with the SPX gaining +2.3% (best week this year) and the NDX advancing +2% (second-best week). This was primarily driven by the dovish FOMC, NVIDIA's GTC conference, and strong earnings reports from Micron, which fuelled a broader AI uptick.

One fun fact to share: it took 757 days for the SPX to move from 4800 (Dec 21) to break 4900 (Jan 24), but only 56 days to break 5200 last week. Our view on the US equity market remains "buy-the-dip." Since 2022, the average pre-FOMC excess sell flow has been around $66 billion, followed by an average 7.1% increase in the SPX within the next month, with all 8 instances resulting in gains. In the current pre-FOMC cycle that began on March 8th, the sell flow amounts to approximately $72 billion.?

Furthermore, in the past two years, macro factors have been the primary drivers of the US stocks. However, the recent 3 CPI prints have shown a significant decrease in the vol of capital flows: -$2 billion on Dec 23, +$5 billion on Feb 24, and +$2 billion on March 24 (versus the average range over the past two years has been approximately $20-60 billion). With interest rates overall entering a downward trend,?the importance of cut timing uncertainty for investors is decreasing, allowing for a greater focus on micro earnings. Overall, with the macro trend in place, investors may consider extending their investment horizon to 3-6 months.

Japan

Despite Japan's 4th hike since 1999 last week, which included exiting NIRP and scrapping YCC, the yen further weakened against the USD due to Ueda's cautious and dovish tone. Currently, the market is primarily focused on three things: 1) Future BOJ rate hike policies, 2) Frequency and scale of JGB purchases, and 3) USDJPY.

The BOJ has consistently refrained from announcing any specific timeline for the next rate hike. However, given significant rise in inflation and wage adjustments, the market anticipate another rate hike to occur in July or October within this year. Ueda also confirmed on last Friday in parliament that net purchases of JGBs would be maintained at ￥6 trillion/month.

We believe that between safeguarding JGB and FX, the BOJ still prefers to keep the long-term JGB yields at a low level, in order to ensure that its ultra-loose monetary policy of the past decade can be continued and the government as well as private sector to continue accessing financing at low cost. Additionally, considering that there is a chance for further narrowing of the US rate cuts, the interest rate spreads between Japan and the US will solidify JPY's attribute of carry trade and put pressure on any appreciation of the yen. Therefore, even if Japan raises interest rates (actual interest rates have not risen yet), the yen would require a weakening of the UST Yields in order to gain momentum.

A weaker yen has the potential to further drive the growth of the Japanese stock market though. The NKY has risen 20.6% YTD, with a pullback of around 1.3% this week. It is recommended to consider positioning in Japanese stocks when the yen strengthens (such as being verbally intervened this week) and breaks below 150. We are bullish on Japanese banks and consumer-related stocks like 3382 JT.

China

The HSI received some support during the CNY from state-backed funds, but it still dropped by 3.3% YTD, underperforming than North America, Europe, Japan, and most EM markets. Apart from the longstanding concerns regarding real estate and government bonds, the widening US-China yield difference has made it difficult for overseas funds to flow back in the short term. Moreover, the uncertainty surrounding the US elections, such as the potential impact of Trump's policy on raising tariffs on Chinese exports, further adds pressure on Chinese assets. Therefore, our overall stance towards China equity remains cautious.

Last week, market attention was primarily focused on the release of financial results from leading Chinese tech companies such as PDD, Meituan, and Tencent. PDD's performance was the most impressive, with significant growth in both revenue and profits last year. The rise of its overseas e-commerce platform Temu has become an important engine for its revenue growth, but it could be affected by geopolitical factors. Meituan achieved a turnaround in profitability for the full year, with revenue increasing by 26% year-on-year, and the loss situation in new business segments has also been improved. Tencent also delivered strong earnings, with full-year revenue growth of 10%, and announced that its share repurchase scale will at least double this year. However, as before, given the lack of confidence in the market, strong financial performance may not fully reflect in companies’ stock prices.

In the FX market, the onshore RMB saw its biggest decline in more than two months last Friday, falling below the 7.20 level. However, Chinese authorities reacted quickly on Monday, setting the midpoint at 7.0996 (consensus at 7.2267), signalling their intention to prevent further depreciation of the yuan. In the long run, while the PBOC still hopes for a moderate depreciation of the RMB to stimulate exports, it also aims to control the speed of depreciation and minimize the negative impact on other assets, including stocks and bonds. Nevertheless, as mentioned above, it is expected that the interest rate spread between China and the US will continue to restrict the performance of Chinese assets in the coming year.

Mark Qian

Investment Associate

Poseidon Capital Limited

Email: [email protected] | Tel: +852 4670-9206