Charts of the Week

It’s time for another edition of Charts of the Week! What a week it was. With so much ground to cover, let’s get started right away!

The S&P 500 has seen the weakest breadth since at least 2005, reminding many of what we saw during late 2021 before the bear market started. Where 7 mega-cap stocks accounted for 90% of the gains.

Sentiment turned more bearish in April, and is the most pessimistic that we’ve seen in 2023 based on a Bank of America Fund Manager survey of growth expectations and positioning.

We’ve also witnessed a significant overweight positioning in bonds vs stocks, but what makes this time interesting is that unlike the other two instances bond yields are quite attractive. Indeed, the so-called TINA trade appears to have competition.

ISM Manufacturing data suggests that earnings may continue to decline, but the chart below utilizes a relative measure as estimates have been meaningfully revised lower thus making it easier for companies to beat even if they are showing signs of business slowing.

Speaking of earnings, we are peak season as this week companies accounting for a whopping 42% of the S&P 500’s market capitalization will be reporting earnings. That is likely to spark some volatility, particularly as we are post-OpEx and the market is likely to start moving in a more significant way.

Banks hold over 50% of overall commercial real estate loans, and of them small banks hold about 70% of that exposure. A problem that is likely to impact regional and community banks as the year goes on and commercial real estate shows more stress, particularly in the areas of office space, retail, industrial, and multi-family buildings.

We are beginning to see signs that the labor market is responding to tightening lending conditions, which impact small and medium-sized businesses the most. Because these businesses are also the largest creators of new jobs, this is likely to have a significant impact on the labor market moving forward. Many were hesitant to layoff workers after such a tight labor market posed challenges, but I expect that will change moving forward.

Bank of America believes that the US dollar has begun the fourth bear market in the last half century. I am not so sure. The dollar tends to show strength during recessions, EURUSD long exposure is extremely lopsided, and rate differentials still favor the greenback against major pairs.

Zooming in on EURUSD positioning, we can see that net long positioning is quite long, but the currency itself remains structurally vulnerable as the ECB does not have as much room (or will) to tighten commensurate with what the Fed has already done.

Traders are even beginning to price in another quarter point rate hike in June of this year, suggesting that we still have room for 50 bps from where we currently sit. Suggesting that the terminal rate may be as high as 5.5%.

Fund managers believe that the Fed will start loosening in the first quarter of … next year. Meaning that the proverbial pivot may not come nearly as soon as the market expects it. Nevertheless, it’s important to remember that the Fed pivot comes because there is a large enough problem to prioritize the economy, not just because inflation is coming down.

Copper stockpiles continue to shrink. China’s reopening has not sparked the level of demand that some may have expected as construction is not resuming at the levels we’ve seen during prior cycles as their real estate market remains oversupplied and troubled. Nevertheless, the situation with copper is likely to become more precarious in time as exploration and production is rather low.

Electronic vehicles tend to use just under 150 lbs of copper, accounting for a major source of demand for the industrial metal. With global efforts to increase the uptake of these vehicles, it is likely that copper demand will be robust once the west starts its next credit cycle. For now, however, the commodity remains vulnerable to the whims of the global economy, which is continuing to send mixed signals.

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