Leading Indicators Show That Equities Remain Vulnerable In MT

• Market volatility has been easing significantly in recent weeks, leading to a sharp bounce in US equities, up nearly 15% since their mid-June lows.
• The fall in risk aversion has also been weighing on the US Dollar, with the DXY index consolidating by nearly 4% to find support at the 105 level this week.
• Investors have been questioning if equity markets find a low in June and if the ‘dovish’ expectations priced in for 2023 onwards could generate more support for risky assets.
• However, we previously saw that global leading indicators such as South Korean exports or Chinese imports have been showing that global demand has been weakening and still have been pricing in volatile market in the near to medium term.
• The chart below shows that SK exports have strongly led equities EPS by 3 months in the past two decades, therefore further deceleration in exports and global trade could continue to weigh on risky assets in the near to medium term.

• Business surveys have also been falling since the start of the year, driven by the surge in inflation and the dramatic tightening in financial conditions.
• The chart below also shows that the Philly Fed Index has been pricing in a significant deterioration in the business activity, and has also historically strongly led SP500 EPS by 3 months.

Source: Bloomberg/MNI