📑 Research Notes for 2023-05-22
This week, we look at changing liquidity trends in the U.S. and Europe, higher yields amid the debt limit standoff, and increased interest in Japanese equities.
We conduct extensive investment research and share the most interesting content that we come across every week. Here is a curated list of this week’s top observations.
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Last Week’s Market Performance Heatmap
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Risks of Shrinking Liquidity and Growth in the U.S. and Europe.
The liquidity outlook in the US and Europe has shifted from a favorable scenario to one with higher risks of shrinking liquidity and growth. Recent developments indicate a decline in liquidity, which has significant implications for various financial sectors. The regional banking sector in the US is experiencing stress, leading to shrinking liquidity. In Europe, liquidity trends are also pointing towards a substantial shrinkage. Defensive allocation strategies are becoming increasingly attractive as liquidity levels decrease. Sectors such as healthcare, consumer staples, and utilities are expected to outperform high-risk sectors like technology and consumer discretionary. As the reporting season concludes, the timing may be right to reposition portfolios defensively, which could include increasing exposure to bonds.
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PIMCO Warns of Potentially Higher Yields Amid Debt Standoff.
PIMCO's Schneider believes that the current debt standoff is not causing significant stress in the market, but fears could be exacerbated to the tune of hundreds of basis points, if not more in T-bill yields. He predicts yields in excess of 7-10%. Schneider advises investors to focus on cash management and finding opportunities to earn liquidity premiums to get returns of 5.5-6.5%. He also warns that once the debt ceiling is resolved, liquidity in the overall system will be somewhat diminished as new issuance comes to the market and the treasury needs to rebuild its cash balance.
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US Treasury to Issue Debt after Ceiling is Resolved, Risking Painful Liquidity Squeeze.
The US Treasury could issue up to $1 trillion in T-bills in the coming months, which could cause a painful liquidity squeeze in the market. This comes as Congress faces a deadline to raise the debt limit, which could lead to a default on US debt if not addressed. The Treasury is expected to use its cash balance to fund the government until October, but after that, it will need to borrow more money to keep the government running. If Congress fails to raise the debt limit, it could lead to a catastrophic default on US debt, which would have severe consequences for the global economy.
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Foreign Investors Continue to Buy Japanese Equities Amid Tensions Between China and US.
Foreign investors have bought Japanese equities for the sixth consecutive week, with the news that Warren Buffett increased his investment in Japanese trading houses in April being a major catalyst. Japan's unique position in the intensifying tension between China and the US is also attracting investment, as some investors shift away from China due to disappointing economic data. The sustainability of this trend is uncertain, with some questioning whether it is a fad or a long-term trend.
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Curated by Joseph Lu, CFA®
Joseph is the founder and managing director of Conscious Capital Advisors, and a CFA® Charterholder.
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