Paul Markham, head of global equities at Newton Investments, discusses how traders could capitalize on the seasonal low volume and highly volatile environment. He also unpacks his view on opportunities in the AI / semi-conductor space, the Chinese real estate market and the danger of the Bank of England being overly aggressive in their interest rate move this week.
North America
- Equities volumes are very low and liquidity is poor for the year to date.
- US investment grade volumes have stabilized and liquidity appears good as bid-ask spreads are tight for 2023.
- Data: Job Openings on August 1 and US Unemployment Rate and Non-Farm Payrolls on August 4.
- US axe data, which is within normal ranges, indicates a much higher proportion of buying versus selling in credit.
Europe / UK
- Equities volumes remain down yet bid-ask spreads appear marginally tighter than the 2023 weekly average.
- Euro Investment grade volumes are low for the year but liquidity is good for year-to-date ranges.
- Data: Eurozone GDP and Core Inflation on July 31; UK unemployment August 1 and BoE rate meeting August 3
- EU axe data, which is within normal ranges, suggests a higher proportion of EU dealer bids Vs asks in credit
- GBP axe data, within normal ranges, suggests slightly higher net buying Vs selling of credit
Transcript of Interview:
Jo Gallagher: Welcome to Trader TV This week.
In North America, volumes in equities are down and the quality is poor, while US investment grade debt seems to have stabilized. The dip in market participants continues this week, and those of trading desks will be more sensitive to any surprises for earnings for US unemployment data.
In Europe and the UK, volumes across assets are low for the year, but liquidity appears good. This week’s activity could remain low, but markets will be tentatively watching for the latest economic readings out of the EU and the bank interest rate decision.
Now in more detail.
In North America, the seasonal quiet spell is certainly upon us, as last week’s equities volumes are well below the year to date average. The drop in participants, it seems, has also hurt liquidity as bid-ask spreads were much wider week on week and are generally wide for the year. Last week’s US investment grade volumes are around normal ranges for the year, and liquidity appears good as bid-ask and tight for 2023. It will be quiet in terms of data this week, but we can expect numbers on job openings on August 1st on the US unemployment rate and non-farm payrolls on August 4th.
US axe data in historical ranges indicates dealers bids have increased by 7.2% over asks in the past week, suggesting an increase in net selling credit going into the week ahead.
In Europe and the UK last week’s equities volumes saw little difference week on week, but volumes remain low for the rolling seven month average. The liquidity reading was a bit tricky this week, but bid-ask spreads appear to be marginally tighter than normal for the year to date ranges. Euro investment grade debt volume saw little difference compared to previous week, but levels are still very low for the year. Liquidity has also seemingly improved week on week, and bid-ask spreads are tight for 2023.
This week, markets will be awaiting numbers on the eurozone’s GDP growth and core inflation on July 31st on the U.S unemployment rate on August 1st. The main event, however, will be on August 3rd, as markets are predicting the Bank of England will hike interest rates for the 14th consecutive time.
EU axe data, which is within normal ranges, indicates the proportion of EU dealers bids versus asked has increased by 4.6%. GBP dealer bids are up by 2.5% against asks over the past week, suggesting a slight leaning towards buying versus selling of credit going into the week ahead.
I’m Jo Gallagher and joining me to discuss the week ahead, we have Paul Markham of Newton investments.
Paul, welcome to the show.
Paul Newham: Thanks for having me.
Jo Gallagher: What will traders be focusing on this week and what have we learned from earnings so far?
Paul Newham: Well, as you say, we’re right at the height of the season and two big trends have been impacting on investors minds. They’ve been the persistent presence of inflation, which has driven interest rates high and the advent of artificial intelligence, or AI, which has been a real thing with the equity markets. And I think in both cases there are reasons to expect volatility to arise. The inflationary period is proving somewhat stubborn, so the question there will be whether or not you will have to be going any higher to anticipate changes in interest rate policy by central banks.
And on the AI side there’s a little bit of a conflict between what might be termed the semiconductors cycle and the more secular long term opportunity offered by AI. We’ve seen quite high volatility in certain stocks, and that’s something which traders could benefit from by derivatives or through the cash markets. Clearly, the time of year does impact as well because it’s the summer in the northern hemisphere where many people go away from the office on holiday and we start seeing stocks trade on lower volumes, which can benefit people trying to exploit opportunities within more volatile environments. You know, big moves on stocks might be the opportunity to pick them up cheaply or the opportunity to maybe sell them if they’ve had very strong performances as well.
Jo Gallagher: And why would traders be focusing intently on the semiconductor space?
Paul Newham: We were due, I think it’s fair to say, something of a setback in that space because there is still a cycle in semiconductors, particularly as they relate to gadgets and iPhones and certain types of corporate servers, etc., which tend to end up being rather oversupplied at some stages in the cycle. But this time around, of course, there’s been a new dynamic to the whole IT hardware space, which has been that of AI, and AI needs considerable processing power in order to operate. It also needs huge amounts of data to simulate human intelligence effectively, which is what AI really is. And so there’s been a bit of a two way pull really in the market around whether or not the cycle will win out or whether or not the much longer term, positive growth story, secular growth story around AI will be the victor, and I think several more stocks due to report this week can give us a bit more color around that subject.
Most of the stocks in the space are pretty liquid. So if anybody wants to play these shares on the underlying, I think it’s pretty easy to do that. They trade like water. So I don’t think there’s a difficulty getting an exposure to that. But the volatility will mean there could be some dislocation within those derivatives markets, which for the eagle eyed and the quick to act will probably yield some quite interesting opportunities.
Jo Gallagher: How is the Chinese economy impacting other markets? And how should traders be thinking about that?
Paul Newham: Well, it’s been quite interesting that the inflationary pressures which have arisen in many parts of the world really since the end of 2021, particularly since the invasion of Ukraine by Russia, has been not really replicated in China. In fact, the Chinese economy is finding it somewhat difficult to generate any inflation. And that, although is probably a situation which many in the West would view with envy, it’s not something which the Chinese government really wants because there is a bit of an issue with the real estate market there are stagnating, so the prices around that, and also, of course, the inability of the real estate sector to make profits as a result. So that’s something which I think will be closely watched.
Jo Gallagher: And what’s your view on this week and how will you be trading equities and bonds in response?
Paul Newham: There is no doubt there is a danger that the Bank of England will overshoot in terms of how far it chooses to hike rates and the gilt market has been fretting about. The Bank of England has been somewhat behind the curve in the view of some participants. However, it has chosen to be fairly aggressive. It is looking to stem inflation. The danger, of course, that I referred to in terms of policy error is whether or not suddenly the economy does grind to a halt as a result of interest rates being prohibitively high. And certainly from the point of view of remortgaging, I think the UK consumer will be feeling that pain quite keenly. So everybody will be watching closely as to whether or not the Bank of England will choose to make another rate hike. The market is leaning towards the view that there will be another hike, probably 25 basis points, but it’s by no means unanimous.
Jo Gallagher: Thank you, Paul, for your insights and thank you for watching.
This has been Trader TV This Week.
