The magnificent 7

good morning. South Korea has a new president. Leftwinger Lee Jae Myung has crucially won the national election. Will he introduce long-standing market reforms? The April US job openings and labor turnover survey, close to our home (our) was released yesterday. That worked: layoffs increased, but so did job openings. Email: Unedged@ft.com.

Return of Magazine 7 (and the US)

As everyone knows, this year, world stocks whipped our stock:

However, if you look at that chart very hard, you will notice that the US (measured on the S&P 500) has caught up a bit over the past month or so. In fact, with a 7% return since the beginning of May, the US appears to be revived. However, the US recovery has a very specific and familiar taste. It is driven primarily by big technology. Specifically, over two-thirds of Nvidia, Microsoft, Meta, Broadcom, Amazon, Tesla and Alphabet come from just seven shares. They added a value of 2.4tn over the period. I call them “magnificent sevens,” which is slightly cheating. I replaced my Broadcom with a Canonical Apple.

Still, Big Tech is keeping the index once more. Take out the (slightly recalibrated) Mag 7 and the market has been gaining 3%, since May. How do you read this uneven distribution of profits? The half-empty type of glass would say narrow gatherings are unsustainable. Half of them would say Big Technology will provide leadership, along with Deutsche Bank’s Marion Labour. “As before, the Mag 7 performance probably serves as a barometer of broader risk emotion,” she writes.

The Mag 7 has always been the appeal. With the exception of Tesla, these have high barriers to entry, high free cash flow and strong growth. Yes, they are expensive (other than the alphabet, they all trade at a more or less meat premium against the US market, but in itself isn’t cheap at all). However, it is difficult to find a business that is closer to the same scale and positions. However, their recent good performance doesn’t depend on a reassessment of their growth outlook. As you can see in the third column below, the group’s revenue estimates have not been revised much – and some have been marked down.

Not edited, it’s embarrassing to admit that we’re a bit confused by this. Tesla’s performance may depend on Elon Musk’s decision to leave the government and focus on business despite a big revenue markdown. After all, stocks were basically never actually traded. For the rest, they may be responding to the possibility of US-China trade detente, typically as a global stock, and the perception that Donald Trump’s bark is consistently worse than his bite (if there is a memorable acronym for that). But if that’s true, wouldn’t product-based non-technology companies be more obvious? Readers, if you have a theory, send it along.

Dollar

Two months after the “liberation day,” you can take a step back and consider how the market has changed. The most impressive and most debated new trend is the combination of rising Treasury yields and weakening of the dollar. As an illustration, here is the dollar index plotted against the gap between the 10-year Treasury Ministry and 10-year German out-und yields. There was obvious divergence:

This is a topic we’ve touched on a few times, but the chatter continues. Some have maintained it as evidence that the US is beginning to look like an emerging market.

There is definitely a change. Trump’s tariff policies reduce the US’s appeal as a capital destination, and the growing deficit is frightening. But Capital Economics’ Jonas Goltermann would be exaggerating to compare the US to emerging markets, or the UK.

When (the dollar shortage) first began in April, I felt like, “Oh, my god, there was a crisis and there was something like “transnemics” in Britain. But the call for that really stopped. The market has recovered. The divergence (of dollars and yields) is still there, growing, responding to picture headlines of trade and finances. It is to some extent related to government policies. But that’s not a crisis. It’s not trussenomics.

There was not a very large rotation from US assets. There were two uneven Ministry of Finance auctions, but the rest was fine for the week of the release date and late May. Meanwhile, foreign influx into the S&P 500 is rising. From the minutes of the Fed’s latest meeting:

The manager (Tracks Flows Data) noted that there was no evidence that foreign investors sold US assets. Available data pointed to a small outflow from fixed income securities, largely offset by inflows into equity securities.

A chart from Bank of America’s Michael Hartnett shows this well.

There is also no need to overstate the increase in yields. The dollar decline along with the Treasury yield is extraordinary. However, bond yields are rising across developed countries. From Robin Brooks at Brookings facility:

I don’t think the increase in yield will be remotely rising to the level of a UK lyz truss bond yield explosion. What we see is quite different in that the US has an upward yield level, but yields are also rising everywhere. . . The rate difference is stable.

Indeed, the gap between the 10-year financial yield in the US and bond yields in other economies has recently been flattened.

Benefiting from hindsight, there are two reasons for a large dollar shift, beyond slight changes in foreign flows. The first is hedging. Ed Al Fsayney of Columbia Thread Needle explains:

If you are a foreign investor, you are buying cash flow. . . These flows are always affected by exchange rate uncertainty. . . If the dollar is weak, it will decrease from cash flow. As an investor, you don’t like the uncertainty of the dollar, and you don’t like realizing the loss of weakening the dollar.

(Investors can hedge hedge) A forward contract will be concluded. Buy Korean victory, buy US stocks and sign a contract to buy Korean victory at a future (specific) exchange rate. It removes the risk of currency. . . But when you enter that contract, there is downward pressure on the dollar. I sold the dollar and won the futures market.

The second is a reassessment of the US economy. Remember how strong the dollar has become on the day of release. Looking at the longer time frame, the dollar still looks strong:

For years, the US growth has surpassed the rest of the developed world. However, growth expectations have been eased, with other countries putting their own fiscal sailings. As Taiwan is the most dramatic, recent currency valuations suggest that foreign central banks are adapting to this new paradigm. But that’s an adjustment from points where the dollar may be too strong. With the deficit, US economic data is still OK. As Paul Krugman points out, US taxes are low by international standards. If the push sticks out, there is room for more revenue.

The United States is not an em. Also, there are no incidents like the truss offshore. It would be more appropriate to call this normalization.

(writer)

One good read

s/ofr.

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