Per GS and Axios, effective interest rates are near historical lows for both S&P and Russell constituents. So, higher rates don’t matter much to these companies--yet. It’s a similar story for consumers, as their effective mortgage debt rate is historically low too. That’s probably why businesses and consumers seem so resilient. Although debt vs EBITDA is higher, short-term debt relative to long-term debt is lower. They note that few companies have ave weighted maturities in the 0-2 year range, so interest expense is manageable. Locked in rates have shielded a lot of folks.
GS and RBC reported that individual investor sentiment is signaling caution. Net bulls in the weekly AAII survey = 21%, the highest level since 2021 alongside low equity volatility. Pullbacks often happen after that number hits 30% on the four-week ave. They also note that growth leadership, which has faltered since mid-July, may stay under pressure. That said, things are still pretty solid considering a weaker ISM/PMI. There has been a broader asset rally, with flows coming into global equities mostly sustained by sentiment surveys, pro-cyclical pricing and systematic strategies. To note, HF gross leverage is back at the highs, so anything spooky would spur de-grossing risks. Systematic strategies such as CTAs are still broadly “risk-on”. But perma bear Mike Wilson even changed his tune this morning on the market.
Shipping is facing a cyclical downturn. Freight rates are near below-breakeven levels. Global orders for new ships are at a record ~ $90 bn, which is high—and this is happening when supply chain issues have mostly resolved. So, companies will be taking stock when they probably don’t need or want it.
Lending conditions are tightening alongside restrictive monetary policy and new capital requirement rules. Citi is forecasting this will hit GDP in the US and EZ by 1%-2% before year-end 2024.
Investors are getting on the tech train, betting that tech can continue to rally, even though there are more rumblings about AI hype. Around ~77% of MLIV Pulse survey respondents are planning to either boost their tech exposure or keep it steady over the next six months. More than 60% of respondents in the same survey believe that AI will not perform core components of their job within the next 3 yrs.
Oil looks to be headed for the biggest mo gain since early 2022, because of tightening. Crude is now in deficit, as global demand hit a record of 102.8 mm barrels per day in July, per GS. They raised their 2023 consumption growth forecast and expect a net deficit of 1.8 mm b/d in 2H23, versus a surplus over the prior 12 mo. Climate activists are not pleased with the U.K. gov after it confirmed plans to grant hundreds of new oil and gas licenses for the North Sea. They are predicting this will save >200k jobs and increase the UK’s energy independence. In addition to new drilling for fossil fuels, there will be two new “clusters” for carbon capture usage and storage.
Verdad put out a good piece. Even though they are estimating $37bn YTD net foreign fund flows into the Japanese market, they note that it pales in comparison to the massive outflows out of the market in the past decade, roughly 3-4x that amount. Also, it’s small relative to the $66bn in buybacks Japanese companies did last year, which was a major move. Most investors are still underweight Japan, so they argue that there is ample room for flows to continue in.
