Investors are waiting to see how some officials might comment last week’s Fed speech and the way it was received by markets.

The past week was rather unusual, because investors took little time to digest the news of a less accommodative Fed in the future. Markets knew that the central bank was going to act, but it seems that they preferred to turn a blind eye for as long as possible.

That worked until Thursday. The mood has changed a bit since then, with significant sell-offs in the US, then in Europe and finally in Asia earlier today. This phenomenon was undoubtedly accentuated by the precautionary profit-taking that took place on the most cyclical stocks, i.e. on the stocks that were popular during the first half of the year, from banking to base metals and the oil sector. Keen observers will have noticed that the sell-offs in the most volatile stocks had already started a few sessions ago, and not at the sound of the gun.

Did the Fed make a communication error by being "irresponsible but credible" for too long? This is what critics are accusing it of, who think that the institution lost the initiative by reacting a little late. Some felt that it was being dictated to. To be fair, it had to deal with a complicated health calendar a few weeks back.

Three scenarios are holding sway on equity markets as we head into summer. The first is a temporary overhang, as there have been several since the beginning of the year. This is the easiest to manage, as it does not involve major shifts in allocations. The second is more complex, as it requires a new rotation of assets. In other words, investors are cautiously returning to more defensive stocks and to the strongest part of the technology segment, at the expense of the winning bets of the first half of 2021. Once the shock of the trade-offs has passed, markets will resume their advance with new engines whose fundamentals seem more solid. The third scenario is identical, with a rotation between assets but indices that retreat instead of advancing, and a correction phase that sets in.

This new context comes at a time when inflows into risk assets have remained at record levels. During the week of June 7 to 13, they were at their highest level since June 2020, according to Bank of America: $39 billion in inflows in equities alone in one week! This means that the fear of missing out on something is still very high. Worse, the fear of missing the train. The reality is that some investors lose all measure when they see the huge gains made in record time on certain assets. Either because they've only known it since they entered markets recently, or because they lose their cool when they see pimply teenagers pocketing ten times their stake in three months. It's at these times that we need to pull out the old market veteran suit and remember that thoughtful, long-term investments in quality companies are always winners and far less scary.

This week, investors will be listening closely to the speeches of central bankers, including Christine Lagarde (ECB) later today and Jerome Powell (Fed) on Tuesday. On Wednesday, the Flash PMI indices for June will be the focus, before the Bank of England announces its monetary policy stance mid-day on Thursday.

 

Today's economic highlights:

The Chicago Fed's May activity index is due today, while Christine Lagarde (ECB) is scheduled to deliver a public address at the Women's Political Leaders Summit.

The dollar is trading at EUR 0.8410. The ounce of gold is treading water at USD 1775. Oil is trading at USD 73.25 barrel of Brent and USD 71.43 a barrel of WTI. The yield on 10-year U.S. debt falls to 1.37%, while 30-year debt falls below 2% for the first time since February. Bitcoin retreats towards USD 32,000 per unit.

 

On markets:

* Apple - The German Federal Cartel Office announced on Monday that it had opened proceedings against the group following several complaints of competition law violations.

* Pershing Square Tontine Holdings gained as much as 1.67% in pre-market trading after Sunday's announcement of an agreement to buy a 10% stake in Universal Music Group from Vivendi for about $4 billion.

* Raven Industries - CNH Industrials completed the purchase of the industrial group for $58 per share, a total amount of $2.1 billion , in order to strengthen its agricultural equipment business. The stock jumped 47.1% in pre-market trading.

* Amazon - The German trade union Verdi has called for a three-day strike at seven Amazon sites as the U.S. giant's global Prime Day promotional event gets underway.

 

Analyst recommendations:

  • Arcturus Therapeutics : Barclays cuts to underweight from equal-weight, price target to $25 from $33
  • BT Group: New Street upgraded from buy to neutral. 
  • FIGS : BofA Securities starts at buy with $42 price target
  • Flywire : Goldman Sachs starts at buy with $53 price target
  • GlaxoSmithKline: Barclays confirms its negative recommendation, keeping its Sell rating. The target price remains set at GBp 1250
  • HSBC: UBS maintains a Neutral rating. The target price remains set at GBp 450.
  • Intel : Citigroup adjusts price target to $60 from $65, maintains neutral rating
  • Ocado: Morgan Stanley upgraded from Overweight to Overweight targeting GBp 2825.
  • Paymentus : Goldman Sachs starts coverage at buy with $54 price target
  • ResMed : Needham adjusts price target to $267 from $229, buy rating kept
  • Rio Tinto: UBS upgrades from neutral to sell.
  • Singular Genomics : Goldman Sachs starts coverage at buy with $35 price target
  • SSE: Jefferies upgrades its Buy rating to Hold with a target of GBP 1680.
  • Sykes Enterprises, Incorporated : Baird downgrades stock to neutral from outperform; price target remains $54