Semiconductors remain the dominant theme in the markets as investors continue to pivot towards the sector, which is still viewed as a structural beneficiary of the AI narrative, supported by strong earnings growth and relative insulation from the ongoing Middle East headlines. At the same time, a barbell trade is unfolding, with capital also flowing into energy stocks, benefiting from sticky and rising oil prices, as the closure of the Strait of Hormuz might last longer than the markets initially anticipated.
With the Semis rally concentrated in US indices, Europe is bearing the brunt of rising oil prices. The SX5E remains stuck in a range despite the ongoing advance in US indices, with weakening price action signalling further potential downside. This relative weakness is reflected in the volatility divergence, with the V2X elevated vs the VIX. Despite the region’s energy dependence, cyclical stocks are still trading close to peak relative performance. despite mounting economic pressure reflected in deteriorating Eurozone economic surprises, a weakening consumer confidence, and softening bank lending.
Hedge fund positioning, however, paints a more optimistic picture. Gross and net leverage in the region, along with the long/short ratio, are hovering near five-year highs, leaving the market exposed to asymmetric downside risks. Adding to the downside risk are signs that the semis trade might be closer to the end of the move, as the market has been moving along the riskier parts of the curve with the latest spike in KOSPI tech names outperforming the broader SOX index, while major US indices approach resistance zones. Rising yields and rates volatility are also a negative for equities.
We reiterate our downside positions in the SX5E as set out in our previous weekly notes published on 20/04 and 27/04 . Broader macro thoughts can be found in our GM Weekly Equity Views.