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  • Markets Update - May '24

Markets Update - May '24

S&P 500 hits new all-time highs, EU and US elections, and Andurand on copper.


  1. Equity and Bond Performance

  2. EU and US Elections

  3. Pockets of Interest: Copper and Gold

1. Equity and Bond Performance

The S&P closed April down more than 4%, interrupting a 25% bull-run that has been in place since early November last year, mostly driven by the continued resiliency of the US economy and a strong earnings season (80% of S&P 500 companies beat consensus earnings estimates), all of which continued to push out the expectations of a rate cut.

But as we moved into May, the S&P 500 started moving higher once again driven by a sharp move lower in yields, credits due to the dovishness out of Powell’s last speech which signaled how unlikely it would be for the next policy rate move to be a hike. This was followed by yesterday’s US inflation print, which confirmed expectations of a deceleration versus the first three months of the year, leading the S&P 500 to fresh all-time highs.

Looking ahead:

  • The market, which at the end of last year was pricing the first rate cut to take place in March 2024, now thinks that the Fed will only cut rates twice this year, with the first cut expected for the September meeting.

  • The Fed now finds itself not only trying to cut rates as soon as they get reassurance on the inflation side but also wanting to do it in a way that avoids making the policy rate decision look like a political move (a cut right before the US elections is likely to give further momentum to Biden & Co).

The bond market has been instead trading in a range that it entered broadly a year ago.

This range mostly stems from the fact that the market wants inflation to cool off so that the Fed can cut rates, but inflation (especially core inflation, which mostly focuses on non-discretionary items) had been accelerating until yesterday on a month-on-month basis, which forced the Fed to delay the pivot.

  • What analysts will be focused on going forward is seeing if yesterday’s deceleration continues, and if so, if the Fed is then given enough reassurance to finally pivot.

  • Looking ahead, any bad macro news on the economic side (wages, economic growth, employment) is now to be interpreted as positive news for risk assets (allows the Fed to cut). But in the absence of a strong new catalyst, we should expect US yields to trade rangebound.

Given that the timing of the pivot is something we have no particular hedge on, we prefer to focus on the broader market conditions which we think are, overall, still positive for risk assets, although returns should be lower than last year. We quote Michael Cembalest:

“While there’s uncertainty about Fed policy rates after the inflation U-turn, other indicators are supportive and should mitigate the duration and magnitude of any equity market selloff. Last year’s regional bank bailout stabilized financial system risks. In addition, net equity supply has been tight for three years in a row.

It’s a strange environment; despite a recovery in risk appetite and high valuations, the new issue market is extremely tight with buybacks exceeding primary and secondary issuance. Tight supply conditions are generally more favorable for market returns, indicating more investor scrutiny on new issues.”

Pair that with the (1) huge amount of cash that’s sitting on the sidelines ($8 trillion) given the attractiveness of cash yields versus S&P 500 yields, and (2) the continued excess liquidity available in the markets, credits due to a benign policy stance from most central banks, and any strong pullback should find a bid.


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2. EU and US Elections

It’s a big year for political analysts as 2024 is the year when the greatest number of voters in history will head to the polls. Two stand out as a focus for us - the EU and US elections. What to consider? We outsourced the insights to Bobby Vedral (one of the people whose opinion in these matters we respect the most).

EU Elections (6th- 9th June):

  • EU elections (June 7-9th) matter, not just because (1) of the “direct” consequence on Brussel’s regulatory agenda, but (2) because of the “protest vote” nature of the election and therefore the “indirect” effect on national politics.

  • Remember that it was UKIP gains at the EUR 2014 election that triggered PM Cameron to call for a Brexit vote at home. Nothing as dramatic will happen this time around, but polls suggest that in the biggest countries (Germany & France) voters are keen to send a message to Scholz/Macron, which could result in substantial gains for the Right and losses for the Left/Green (right table).

  • To keep her job, Von der Leyen will have to row back aggressively on her flagship “Green Deal” and push hard for more border security & defence spending. The investment implications are obvious.

US Elections  (November 5th):

  • After closing the gap in March, Biden/Trump traded sideways in April. 

  • What comes next is Biden trying to (1) “buy votes” through student-debt-forgiveness and stimulus measures – fair game; and (2) pre-empt the Congressional Review Act, by getting as much policy done as possible before the summer.

  • Trump on the other hand has one big card to play: the VP nomination, which can help make significant inroads with communities he tries to target. Remember how Mike Pence helped with the crucial evangelical vote in 2016. Three factors matter: location (help with swing-states), identity (help with Afro-Americans and/or women) and fundraising ability. 

  • And let’s not forget the independent guerrilla fighter: JFK Jr, who being just 70 years old is truly “the Junior” in the race. He has no chance of winning, but could easily become kingmaker, especially if he gets on the ballot in more swing states like Michigan. Polling nationally around 15%, he is already as big as Ross Perot in 1992. And while the Democrats have historical PTSD with 3rd party candidates (Ralph Nader in 2000, Jill Stein in 2016) even Trump is getting nervous as Junior polishes his credentials of being the authentic “screw-the-system” candidate.

The policy outcomes for a Biden and Trump victory have been well explained by Don Schneider at Piper Sandler Research:

  • Trump win: 2-3x higher tariffs on Chinese goods imports; a repeal of corporate Alternative Minimum Tax of 15% as well as the buyback tax; higher defense spending and further tax cuts (as per the Tax Cuts and Jobs Acts of 2017); potential militarized mass deportations.

  • Biden win: ~$2 trillion in tax increases (half corporate, half high net worth) to support $2 trillion safety net expansion; risk of wider deficit as tax collections undershoot estimates while spending exceeds them (i.e. the pattern with the energy bill, ironically named “the Inflation Reduction Act”).

Independently of whoever wins, it seems to be the case that it should lead to higher wage inflation (Trump mostly), higher budget deficits (both), and higher inflation for longer (both).

3. Pockets of Interest: Copper and Gold

Andurand on copper:

  • Many do not really understand the demand inelasticity and what really makes a price. The recent price action of cocoa shows what happens when we have too little of a commodity: prices can explode. We have seen major moves in metals in the past when there was a shortage. The expected copper shortage should be much larger than any shortages we have ever witnessed. That justifies a very large price move, not a 10-20% move. Remember that copper is a very small percentage of the cost of the end-products it is used for. Supply takes many years to react, and demand is becoming less cyclical and less price sensitive due to the energy transition and the growth of AI data centers.

  • We are moving from a market where we had 500kt/year of mining supply growth and 500kt/year of demand growth, to a market where we will have 1MT/year of demand growth and no mining supply growth. But already we see deficits of about 500kt/year this year and next, before growing and reaching the millions of tons per year by 2028. We started 2024 with less than 400kt of visible inventories. So, there is a large probability that we will run out of visible inventories sometime towards the end of the third quarter if we do not see much higher prices before. There is about 1.4Mt in the SRB (Chinese strategic stocks), but they will only release some at prices above $10,500/ton, but not much as they know that we are starting a multi-year deficit.

Authers on Gold demand from China:

  • One way to hasten de-dollarization, or dethrone the dollar as the sole global reserve currency, would be for China to back the yuan with gold, in much the same way that the postwar Bretton Woods agreement centered on a dollar that was convertible into gold.

  • China would have to amass gold reserves per capita at least the equal of the US before its currency could enjoy the same credibility. Assuming US gold reserves stay constant, China would need to increase its current 7.3 million ounces of gold to 1.1 billion ounces.

  • To achieve parity, in the words of Erb and Harvey, “would be a significant undertaking since the entire amount of gold mined in 2022 was 116.6 million ounces according to the World Gold Council.” To get to 1.1 billion ounces, it would have to buy every ounce of gold mined for almost the next nine years. If China wanted to rely on the gold it mines itself to make up the difference, that would take 85 years (although that could be shortened if they increased annual production).

  • This obviously doesn’t mean that China will be buying every ounce of gold mined over the next decade, but it gives a hint to the amount of pent up demand that there will be for gold in a world that is geopolitically breaking into different spheres of interest.