DR.CHENJIAZI ZHONG

In Brief

• Momentum equity style factor is outperforming, backed by a sustained economic expansion.
• Oil prices entered a bear market on concerns about higher-than-anticipated global supply.
• Baa spreads hit fresh lows.
• A notable Leadership shift since Comey’s Testimony in early June: Technology price looks corrective while financials are reaccelerating.
• Stock volatility is near an all-time low.
• U.S. and euro zone inflation data could shed light on the direction of central bank policies.
• U.S. long-term yields fell in June mostly in response to another weak U.S. inflation print.

The recent disconnect between the Fed normalization and the falling long-term rates is partly a result of markets overly focusing on softening inflation data, while the Fed focuses more on the outlook. This dynamic could persist in the near term. The sustained above-trend global growth and stabilizing inflation ahead, indicating the impact of the Fed’s pace of normalization may be greater than bond markets currently anticipate.

The growth rate of France in the first quarter of the year has been revised up to 0.5%, which is the latest sign that the euro zone continues to recover. European companies have posted their fastest quarterly growth since the debt crisis started six years ago, but growth dipped in June, suggesting a slight slowdown. Worries over Brexit and deflation loomed over the City after a week of oil price falls. The European Central Bank has launched a bid to wrestle control of London’s euro-clearing market.

While the S&P is roughly unchanged over the last several weeks, credit conditions remain supportive with Baa spreads hitting fresh lows last week, which marks an important difference from 2014 and 2015. Weakness in Oil and the Energy patch has not impacted corporate credit to any meaningful extent thus far. Similarly, the weakness in retail stocks and the rise in retail CDS have largely remained contained as well.

Momentum equity style has historically outrun the broader market, but with periodic sharp drops. The biggest dips in its relative performance have coincided with recessions and financial crises. Momentum tends to perform best during steady economic expansions, which should have ample room to run.

A Notable Leadership Shift since Comey’s Testimony on June 10

On Technology Equity

Recent technology price action, partially evidenced by the Nasdaq-100 Index (NDX), which includes 100 of the largest non-financial companies listed on The Nasdaq Stock Market capitalization, looks corrective. The NDX fell significantly. In the short term, this is likely a market that will continue to be difficult to hang onto, as the volatility continues to be a major issue. The alienation of technology equities from the rest of the market worsened Thursday as another violent industry rotation left the NDX with a loss that was twice as big as that of the S&P 500. With banks clinging to gains after unleashing a torrent of buybacks following Federal Reserve stress tests, money was draining from computer and internet companies. The contraction in internal momentum is also consistent with a consolidation pause in technology.

On Financials Equity

Financials are reaccelerating, following a four-month pause. Financials have exhibited renewed signs of momentum over the past several weeks. Internally, financials have been showing signs of reaccelerating for the better part of June. In the euro zone, banks are resuming higher and are now at a five-month relative high. The multi-month consolidation in global bank stocks is also resolving higher.

China Urges Caution in U.S. Steel, Aluminum National Security Probes

The Chinese Ministry of Commerce urged the Trump administration to employ caution in evaluating whether to restrict steel and aluminum imports that threaten U.S. national security. China called on countries to support the free and open international trade system and to resist trade protectionism, and exert caution with various forms of trade restrictions.

It is expected that the Trump Administration will consider a broader definition of national security than just defense needs in the current investigation. Secretary Ross has noted that production of transformers for the electrical grid constitutes a national security concern. Steel producers have highlighted the need for steel in transportation and energy infrastructure, which could be the basis of the national security determination.