May 21st, 2023

Global stock markets opened lower this past week after U.S. Empire Manufacturing saw the largest month over month decline since the 2020 pandemic. Hard landing worries persisted along with real concerns about a potential U.S. debt default. U.S. House Speaker McCarthy reiterated debt ceiling negotiations were still far apart while President Biden was set to leave for the G-7 in Japan with the clock ticking. On Tuesday U.S. advanced retail sales missed on the headline but the control group surpassed market expectations. Importantly interest rates commenced what would be a notable move higher in the wake of Canada’s CPI data. Canada’s much hotter than expected inflation print (the first acceleration in 10-months) may have taken on more significance in some investor’s minds after the Bank of Canada paused their rate hiking cycle earlier this spring. By midweek the tone on the debt ceiling negotiations took on a significantly more constructive turn in tone, after President Biden appointed two of his most trusted and experienced aides to take the lead in talks with the Republicans and House leader McCarthy. Stocks surged led by the Nasdaq  and risk on trade momentum picked up. Gold rolled over and the U.S. dollar rose in reaction to the jump in the U.S. Treasury yields. By Friday U.S. yields reached the highest levels since SVB collapsed in March. Market expectations for an additional Fed hike started to creep in as recession worries faded and Fed hawks like President Logan were vocal, when she noted she doesn’t necessarily see the case for a Fed pause yet. On Friday Chairman Powell struck a narrative that appeared to be right down the middle in terms of what we recently heard from his colleagues. In a short panel appearance he largely reiterated the message provided at the FOMC press conference earlier this month. His commentary was overshadowed by news out of Washington that the debt talks had broken off. Mccarthy’s team walked out calling White House demands unreasonable while reports noted it was not just one issue, but several that have remained problematic. Finger pointing quickly ensued from both the GOP and White House, and no additional talks were expected on Friday. Stocks rolled into the red mid-session and yields moved off the highs while gold prices recouped some of the week’s losses. U.S. T-bill yields remained above 5% all the way out to the 1-year note. For the week, the S&P added 1.7%, the 50/50 Nasdaq/Russell benchmark rose 2.4%, European bourses advanced between 1% and 2%, and Asia Pacific stock markets were either side of the flatline, except for Japan’s Nikkei which surged 4.8%. Your BSD Global Tech Hedge Fund kept up to the world pace with a gain of 2.4%. A weak earnings report from Home Depot kicked off the retail portion of earnings season potentially fanning lingering hard landing worries. Targets Inc. Q1 earnings were better than expected but Q2 and FY guidance was notably conservative. Management acknowledged the softer sales trends experienced in Q1 continued into May which was a narrative repeated on other earnings conference calls throughout the week. Walmart’s strong Q1 results and raised guidance definitely allayed some of the ongoing growth concerns. Western Alliance Bancorp surged after the bank noted total deposits rose in the last week buoying the entire regional bank complex mid-week. Cisco reported better-than-expected earnings and sales results for its third quarter but initial stock weakness was attributed to worries about waning order growth. Deere reported exceptionally strong results and significantly raised their FY forecast for profits. Netflix was the poster child for strength in the Nasdaq 100 which surged to a fresh 52-highs. The streaming behemoth noted that their ad tier service now has more than 5M monthly users.

Investors will be watching the U.S. debt ceiling showdown again this coming week as the threat of a government default of some sort becomes more real. Unless an extension or agreement is hammered out in Washington, analysts warn potential negative scenarios include Congress raising the debt ceiling so that the U.S. Treasury can make timely payments on its obligations, near-term debt service prioritization over other domestic payments, a short default on coupons, and defend a prolonged and damaging delay in debt service. Against that uncertain backdrop, several Federal Reserve board members are on the speech circuit next week and the minutes of the last FOMC meeting will be released. Meanwhile, the tech earnings calendar features big reports from Nvidia and Snowflake. On the event calendar, the Microsoft developers conference could create some headlines. In the U.S., the latest report on personal income should show an increase in April (+0.6%) thanks to a gain in the wage/salary segment. Personal spending, meanwhile, could have increased 0.3% if previously released data on retail sales is any guide. Next week is big for the U.K. as we get a selection of data that will give us our first real insight into how much progress is actually being made on inflation. On Friday, consensus for the leading Tokyo core inflation data (excluding fresh food) for May is expected to slip slightly to 3.3% year-on-year from 3.5% in April.

Our BSD Global Tech Hedge Fund is positioned for both a stock market break up or a break down, with 10% cash and 90% invested across a couple dozen tech vendors and tech end-users, thereby allowing the Fund to participate if this stock market moves higher, and a 25% short equity indice hedge on the notional value of the invested stock portfolio that will incrementally grow (from the laddered Nasdaq put options strategy) if the market deteriorates.