Asia open: The ‘good-news-is-bad-news’ trade persists



US stocks suffered a third consecutive daily decline as the ‘good-news-is-bad-news’ trade persists with Tech weighing after lower-than-expected weekly jobless claims, which fell below the 2019 average.

Markets are underperforming as investors digest an upward revision to unit labour costs and a drop in initial jobless claims against consensus expectations for a slight increase. Both data points indicate strength in the labour market, which, together with robust growth in the US economy, could indicate some unease that the monetary policy stance could remain tighter for a bit longer.

Interestingly, while equities display a very defensive lean, 10-year US Treasury yields are down — as compounding unsavoury higher-for-longer macro matters, global growth concerns are climbing back into the narrative with even the pessimists in Europe getting nervous; indeed, Europe’s economic heartland is in dire straits as German industrial production goes from bad to worse.

Conversely, recent economic data in the United States has surpassed expectations, leading many investors to believe that a soft landing is the most probable outcome. However, a broader perspective reveals the looming possibility of a US recession still lingers large.

The higher-for-longer interest rate narrative and the inevitable lag effect of monetary policy create uncertainty around the Federal Reserve’s ability to steer its monetary policies precisely. As a result, the Fed’s choices in risk management will play a significant role in determining the economy’s ultimate trajectory. Inflation has spiked significantly above its target and could remain very sticky as Saudi Arabia pursues a balanced budget through higher oil prices. Therefore, it would be wise for the Fed to tighten its monetary policy more instead of less, or at least keep the screws tighter for longer.

Over the past year, the USD has shown a strong negative correlation with non-US equities. This means that non-US equities, especially Asia stocks, tend to perform poorly when the USD is strong. Unfortunately, the global growth outlook has not been great lately, which may make it challenging for non-US equities to perform well. Additionally, the recent increase in oil prices has benefited the US, a mega oil producer, while negatively impacting other significant regions. Given these circumstances, it’s difficult to envision the dollar weakening significantly to veer this non-US equities correlation to a more positive tack.

The focus on Tech has been a key theme this week, with Goldman Sachs hosting their Communicopia + Tech conference in San Francisco.

The recent surge of interest in artificial intelligence within the equity markets underscores the immense potential for new avenues of growth and the profound influence that a captivating narrative can exert on shaping market expectations.

While the concept of AI isn’t new, its allure has gained substantial momentum since the introduction of ChatGPT. This wave of enthusiasm has triggered a significant reevaluation of the technology sector, with a spotlight on the “early winners” – companies deeply committed to innovation and substantial investments in AI and those facilitating its commercialization.

Particularly noteworthy is that the technology sector has continued to perform despite rising interest rates. This starkly contrasts the scenario in 2022 when escalating interest rates, driven by surging inflation, caused a decline in the technology sector due to its “long duration” nature, which makes it sensitive to upward adjustments in discount rates.

And to be clear, much of the recent market angst and stronger dollar is coming from easing bets in 2024 being scaled back rather than any expectations that the Federal Reserve will hike again this year. With investors factoring in substantially higher future growth rates from AI, perhaps this counterbalances the impact of higher for longer, so long as the market remains in the Fed pause camp, that is.

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