2025.05.12 Weekly
Not much has changed…
Global equity aggregates (e.g. ACWI, EFA, EEM) closed slightly negative for the week alongside SPX and NDX. A look under the hood suggests US equities is on firmer footing however with some broadening in the rally. Data continues to be relatively stable via a better-than-expected ISM Services and spike in jobless claims receding, while corporate earnings also fared better than expected. Trade policies remains the dominant narrative of which continues to point towards further ‘deescalations’ — the latest of which saw a formal meeting between the US and China after a series of retaliations took their respective tariff rates to 145% on China imports, and 125% on US imports.
A very good meeting today with China, in Switzerland. Many things discussed, much agreed to. A total reset negotiated in a friendly, but constructive, manner. We want to see, for the good of both China and the U.S., an opening up of China to American business. GREAT PROGRESS MADE!!!
That’s what Trump had to say about the meeting which curiously mentions a “total reset” — not sure what to make of that yet but it sounds positive, as well as the “great progress made”.
Market’s are in good shape reflecting the positive newsflow we’re seen since the liberation day tariffs, but there is a sense on twitter-sphere that the rally is starting to become a bit ‘hated’ or met with a high-degree of skepticism having seen a number ‘mispricings’ and ‘underappreciated risks’ type comments floating around. I think it’s a good time to take stock and see what’s changed (nothing).
First, I’d pushback on those mispricings which I’d disagree with, or at least until a significant recessionary impact is looking far more likely than it is now that makes current pricing more dubious. To illustrate, I consider where liberation day tariff expectations and the SPX were prior to the announcements, as well as the developments since in the above chart.
If we broadly accept that ongoing negotiations is headed towards what was initially expected by the market, then SPX at current levels would look reasonably priced for what little information we have so far.
Second, I’d also add that risks continue to be the upside as we have yet to break the ‘positive reflexive loop’ in market narratives under my Soros-inspired (momentum) thesis I’ve been writing about in recent weeks; and to break that loop, there needs to some negative catalysts for the current narrative to stall out and ultimately change from what is likely to be ‘deescalations’ to ‘recession’.
DATA REVIEW
ISM services ticked higher to mark the 10th consecutive month of expansion; manufacturing contracted further.
Services business activity remains stable, new orders saw a 1.9ppt increase to the highest reading so far this year, employment remained in contraction but at a slower rate, prices paid increased 4.2ppt to 65.1 which is the highest reading in over 2 years (since Feb’23).
Initial claims on a seasonally adjusted basis was 13k lower than the prior month and 3k below expectations.
90% of the way through earnings season and it’s been a good one.
EQUITIES
Global equities were slightly negative on the week and looks to be in a more reasonable place at pre-Liberation day levels with the prospects of reciprocal tariffs being unwound. Italy’s FTMIB was the strongest of the indices observed while India’s NIFTY was the worst last week suffering from the cross-border escalations with Pakistan.
US equities down slightly at the index level weighed down by larges losses in AAPL and GOOGL, but the cross-sectional view shows a rally that is broadening into sectors and factors outside growth/momentum. SPX and NDX negative but their equal-weights finished positive, and small-caps +0.52% outperformed large-caps -0.74%.
The broadening is evident in this breadth chart also with the number of stocks trading above the 50 and 100-day continued to increase as the 20-day series eased from the extremes.
VIX settling ~3.5pts lower just below 22 and slightly above the pre-reciprocal tariff announcement close. SDEX and TDEX on the other hand sunk below those pre-announcement levels indicating very little interest downside positioning, as well effectively pricing out the left tails. Also the Put/Call being back at the low-end reflects a market that is bullish, and when sentiment/positioning is bullish into a monthly OPEX (this Friday), we would usually expect further upside momentum because it forces market makers (who are short calls) to buy more of the underlying asset (as a delta-hedge) the more those calls go further in-the-money; this creates positive feedback loop on price particularly as those options get nearer to expiry.
COMMODITIES
Commodities taking on a risk-on complexion with the bounce back in energy and metals.
RATES & FX
Relatively decent data, receding recession risks as trade talks continue, and renewed inflation pressures is continuing to shift the yield curve higher.
Rate differentials are widening in favour of the USD followed by GBP, and particularly against NZD followed by JPY.
NOK the strongest appearing to get a lift from the big bounce back in Energy, and GBP getting the support of a not as dovish BOE with a 5 to 4 rate cut decision and a US trade deal in the works. CAD was the weakest on weaker data — employment data missed expectations with UE-rate rising to a 3-year high of 6.9%, and IVEY dropped into contraction at 47.9 which was below the prior month’s 50.2 and below the 51.2 expected. USD saw an expanded range and a higher high as recession tails get eroded on trade deals being made and economic data holding up.
I’d say the 4-week average on those equal weighted indices is a good guide of the technical bias for the week ahead:
- Above/bullish: USD GBP AUD NOK
- Below/bearish: EUR NZD CAD CHF JPY SEK
USD bullish continuation bar points to further reversion higher. Bounced back strongly from a weak start, and the higher high and close with the low off the trendline makes for a robust price action signal.
I continue to like USD longs vs JPY CHF and EUR with their respective index charts, in particularly JPY and CHF looking increasingly bearish.
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That’s all for now. Good luck trading.
