In line with our expectation in Close out -QQQ June24 390 Puts, global markets rebounded over the last two weeks, reversing a three-week string of declines as easing geopolitical risks and ongoing strong earnings from technology companies offset stagflation concerns sparked by the latest weak Q1 GDP and a series of consecutive hot inflation data in the US. We re assess our previous short-term bearish bias, as liquidity tailwinds are reappearing, and we are now adopting a short-term bullish view on the markets.
The May FOMC meeting was notably dovish, as Fed Chair Jerome Powell expressed his reluctance to tighten monetary policy further this year despite persistent inflation. The Fed also announced the reduction of the monthly Treasury runoff cap from USD60bn to USD25bn, despite ongoing QT being offset by the draining of the Reverse Repo balance. At the same time, the US Treasury is reintroducing a buyback programme for the first time since 2002, aiming to enhance market liquidity through weekly buybacks of up to USD2bn from 29 May to July 2024. Additionally, the Treasury's preference for T-bill issuance over longer-term bonds should support risk assets.
Even though the effect of higher interest rates is starting to appear in underlying economic data, reflected in the recent weaker US GDP and job prints, rising delinquency rates, a slight uptick in unemployment data and a high proportion of companies warning of weakening consumer demand, we do not expect any significant effect on earnings in the short term, and certainly not enough to offset the tailwinds from increasing market liquidity. Looking at the Q1 earnings season, c.80% of the S&P500 has reported vs. only 50% of the STOXX 600, and we continue to see stronger earnings performance in the US, with Q1 earnings posting a 5% YoY growth compared to a 7% decline in Europe (Sales: US +4%, Europe -3%). The best-performing sectors in the US have been Consumer Discretionary and Communications, posting c.40% YoY earnings growth in Q1, while in Europe, Health Care and Financials are the strongest sectors with c.10% YoY growth. The weakest sectors in the US are Health Care, Energy and Materials, posting 20%+ decreases to Earnings, while in Europe more than half of the sectors have posted 20%+ declines in earnings.
In terms of positioning, following the recent sell-off, CTAs are now estimated to be in the 90th percentile, from 100th percentile before the sell-off and at a safe distance from the estimated 5000 trigger level. In addition, the recent retail equity flow sell-off appears to be reversing and sentiment is no longer at extreme euphoric readings. Given the residing geopolitical risks, improved liquidity expectations and continued earnings growth, we propose July24 470 calls on Nasdaq (QQQ) costing 0.70%.