Mid Week Market Update - The FTSE 100- is it the most undervalued global stock market?

It’s been a strong start to this week but after the last one, even a small rise is a relief.

On Tuesday Tech megacaps led a rebound in equities, with the Nasdaq 100 up almost 2% and the S&P 500 halting a two-day drop. Tesla rallied after a 6% plunge, Snowflake jumped on an artificial intelligence-related partnership with Nvidia and Facebook’s parent Meta Platforms gained as Citigroup lifted its target.

Alphabet underperformed with an analyst saying Google’s owner was moving “too fast” in AI. Apparently, that’s a bad thing.

For the first time since early 2022, the US consumer confidence report showed that a larger percentage of people expected higher stock prices relative to lower equity values, according to Bespoke Investment Group.

“Stocks are bouncing back after some strong US economic data gave a boost to consumer discretionary stocks,” said Edward Moya, senior market analyst at Oanda.

“The strong consumer confidence report will likely suggest expectations are not for the labour market to deteriorate quickly, which should confirm expectations that a recession will not happen this year, but most likely next.”

For Kara Murphy at Kestra Investment Management, it’s also important to consider that while consumers are continuing to spend, a lot of that confidence is indeed driven by strength in the jobs market.

Treasury yields climbed as the strong data fuelled speculation that the Fed will resume raising interest rates after this month’s pause.

In the run-up to the Fed’s stress test results, a nearly $3 billion exchange-traded fund tracking regional lenders was up over 1.5%.

Analysts largely expect banks to sail through the tests even as regulators explore more stringent requirements in the aftermath of a few collapses in the financial industry. Several executives have recently been trying to temper shareholder expectations regarding dividend increases and stock buybacks — which had been the focus of investors in previous years.

Tuesday’s rebound in stocks extended the S&P 500’s rally in June, with the gauge heading toward its fourth consecutive month of gains — the longest winning streak since August 2021.

This has caused a lot of pain in the hedge fund market as short sellers are ramping up bets against US stocks even as paper losses on the positions have now surpassed $100 billion.

Total US short interest or the amount traders have spent betting against US equities, exceeded $1 trillion this month as the S&P 500 Index extended its advance, S3 Partners LLC data show. The tally reached the highest since April 2022 before retreating slightly with stocks down for a third straight day up to Monday.

The contrarian bets signal that some traders have concluded the S&P 500’s rally in 2023 will run out of steam, and they’re enduring steep losses as they wait for the market to turn in their favour. On paper, the positions are down about $101 billion this year!

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Building bearish sentiment can prove to be a source of support for the market, Hogan said. He said that if shorts continue to be on the wrong side of the trade, they may need to buy back stocks to exit their positions, which could further boost equities.

Yesterday’s rally won’t have helped them out any. Only a large drop in US equities can save them now, and the longer it doesn’t happen, the more painful it will become.

In other corporate news, American Equity Investment Life Holding surged to a record on a $4.3 billion Brookfield bid. Carnival rallied as several analysts increased their targets for the cruise line operator. Delta Air Lines rose after boosting its earnings expectations.

Meanwhile, Walgreens Boots Alliance sank after the drugstore chain slashed its profit forecast, while Lordstown Motors plummeted after the electric-vehicle maker filed for bankruptcy.

European stocks rallied today, with almost every sector in the green, following the gains on Wall Street yesterday after data showed the US economy was resilient.

The Stoxx Europe 600 index was up 0.7% as of 12:30 p.m. in London. Technology and industrial goods were among the top performers as bond yields slipped. However, miners were lower amid continued concern over Chinese growth.

Among single stocks, Swedish real estate firm SBB soared after Goldman Sachs upgraded the stock to neutral from sell following a lengthy period of underperformance. UBS Group AG edged up after Bloomberg News reported that the Swiss bank is planning to cut more than half of Credit Suisse Group AG’s 45,000-strong workforce starting next month.

US data released Tuesday showed orders placed with factories for business equipment rose in May for a second month.

The Stoxx 600 has traded in a narrow range in the second quarter, though it declined for six straight days through Monday amid worries about an economic downturn in the region and as the European Central Bank warns it’s unlikely to be able to declare the end of its interest-rate hiking cycle anytime soon.

“A lot of people are sitting on the sidelines, waiting to see how the most telegraphed slowdown in history plays out,” Alexandra Jackson, a UK equities fund manager at Rathbones said in an interview.

Some hawkish ECB officials are pondering options to speed up the reduction of the institution’s €5 trillion stash of bonds.

“Despite a lot of shocks, the market has been quite resilient,” added Jackson. “For some clients, that’s been quite painful because they’ve been waiting for another sell-off to put more money into the market.” The sell-off just hasn’t happened.

There is a lot of cash on the sidelines, and a huge amount of money invested in shorting the market right now, yet the market is fighting back. If sentiment turns, inflation drops or central banks waiver then the Fear of Missing Out might take hold and really give equities a boost.

The FTSE has suffered more than most so far this year but then that is hardly surprising given investors have "shunned" UK stocks after they clocked up 24 weeks straight of outflows.

UK equity funds have come under heavy pressure this year, with 24 straight weeks of outflows and just one week of inflows so far this year, BofA said, saying British stocks have been "shunned".

UK equities have clocked up just seven weeks of inflows in the past 18 months, according to BofA.

Is this pessimism a British thing? It does look that way. Here is a chart of the CAPE ratios for the UK and its peers.

The Cyclically-Adjusted Price-to-Earnings Ratio is calculated by dividing a company’s stock price by the average of the company’s earnings for the last ten years, adjusted for inflation.

Financial Analysts use the Cyclically-Adjusted Price to Earnings Ratio to assess long-term financial performance, while isolating the impact of economic cycles.

UK stocks are incredibly cheap any way you look at it, yet Britons are still selling. The FTSE has underperformed its peers but given just how much has been cashed in, it’s actually holding up fairly well. When sentiment in the UK turns, that value has a long way to go.

The rest of the week still has some legs to it as we’ll see a preliminary inflation report out of Germany tomorrow. Last month this showed a decrease month-over-month but the markets are looking for an increase of 0.2%. Anything less and the ECB’s talk of higher rates for longer will start to lose credibility.

We also have US GDP figures tomorrow followed by French inflation and UK GDP on Friday. These should provide plenty of interest for our traders. We will update you in our end-of-week report, but fingers crossed we see more evidence of cooling inflation in Europe.

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