Sentiment/Valuations/China/Europe

After seeing an extreme ‘Euphoric’ read in the Citi ‘Panic/Euphoria’ index as stated on Tuesday and and extended level of bullishness in yesterday’s II figure, today’s AAII sentiment gauge of individual investors saw a 4 pt rise in Bulls to 33.1 after last week’s 5.7 pt increase. That’s a 6 week high. Bears still outpace them though but less so as they fell 2.9 pts to 42.1, the lowest since March 5th. Bottom line, while I believe the AAII figure is the least helpful because it’s so volatile week to week, the extreme bearish read we saw in early May has receded.

AAII BEARS

AAII BULLS

What’s amazing about this equity market rally is that with the S&P 500 back to where it was in late October, the assumption at the time was earnings for 2019 were going to be about $165, the highest level ever. The estimate for 2020 was about $175. For the lost year of 2020 expectations are now instead $125 and throw a dart on 2021. It will certainly be higher than 2020 but with profit margins tightening, god knows where revenue will be and many stock buybacks on hold for a while, I’d argue that we are years away from getting back to $165 per share. This said, valuations mean nothing right now as the reopening of our economy is the only thing that matters it seems, along with all the Fed largesse. I was a lot more confident of an equity rally in March because I felt we were going to get our arms around covid. Now I’m not confident at all about where we go with these excessive valuations now in place.

China wasted no time in passing the new national security law for Hong Kong as another nail in the coffin of Hong Kong’s independence is now in place. The vote was 2,878 to 1 for it. I wonder who that one person was. The question now is what is the global community’s response, particularly the US. I’m sure it will first start with sanctions on certain Chinese officials. The special trading status of Hong Kong is more delicate because we don’t want to hurt the people of Hong Kong. The Hang Seng closed down by .7% and the H share China index was off by .2%. After falling to the weakest level since last year, the offshore yuan is little changed as the PBOC engineered a stronger fixing to stem the weakness.

The Bank of Korea cut rates by 25 bps as expected to just .50% which is a record low for them. They also kept the door open for more policy steps “other than rates” if “deemed necessary.” I guess they mean QE as money printing is now a global tool to what end I don’t know with the level of debt so high already.

Of note in Europe was the economic confidence data. The main index for May rose slightly to 67.5 from 64.9 and that was 3 pts below the estimate. This printed 103.4 in February. Manufacturing remained deeply negative but 5 pts less so from April while services deteriorated further. Consumer confidence rose but off a very weak figure. Retail was up a hair while construction weakened again. Bottom line, with more and more things reopening, the June and July prints will be so much more relevant. The euro is little changed right at the $1.10 level. Sovereign bond yields are lower while stocks are mostly higher.

ECONOMIC CONFIDENCE