Inside Markets — Catalyst Ahead

Eurozone equity markets have outperformed US equity markets lately with the Euro Stoxx 50 up +12.52% YTD while the SPX is down -2.20%.  At first, the dispersion looked like a reflexive impulse to China’s DeepSeek-induced bout of Tech optimism.  Mainland China has drafted off the DeepSeek accomplishment with a respectable return of +3.96%, while the tech-weighted Hang Sang Index has gained +24.64% YTD.  The two markets are linked because Europe’s major equity indices are more weighted toward Materials and Industrials than US indices.  But conflating the YTD outperformance of these two markets to form a narrative around a global manufacturing cycle seems premature.  The two stories are similar in that both were unloved and under-owned at the start of the year, but the moves look fundamentally independent from one another. China’s relative outperformance looks like AI optimism, whereas Europe’s outperformance seems to be driven by cyclical forces as the region finally woke up to growth and security realities.  Last week, the EU rolled out rules meant to deregulate industry so they could compete with the US and China.  This week, Germany lifted its debt brake to add to its military budget and fiscal spending plans.  China’s Tech optimism also has policy support with the recent Government Work Report (GWR) focused on ramping support for R&D, speeding up digitization/investment in high tech manufacturing and promoting adoption of LLMs.

US equity markets look less exceptional than Eurozone and China markets after the recent pullback, but they’re still ok.  Bear markets (down >20%) usually happen because of a recession or at the start of a Fed tightening cycle.  The US consumer (savings/balance sheet etc) is in good shape, so the economy should be able to withstand a brief period of uncertainty, and the Fed isn’t going to tighten anytime soon.  The inflationary impact from tariffs is temporary and real rates remain highly restrictive, which should provide room for the Fed to cut if a slowdown turns into something more serious. We’d get more worried about the slowdown becoming a recession if credit spreads make new cycle highs (October).  Investment grade spreads now at 51.4 need to break above 54.3 and High Yield now at 326.6 need to get above 358.

Bearish equity sentiment remains at extreme levels (57.10) using updated AAII polling data, while positioning continues to drift below neutral.   

The copper/gold ratio is challenging the Nov-March base pattern resistance area.  An upside breakout would increase our conviction that cyclical cross markets (Europe and China) are signaling more durable trends.