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2 Markets 2 Different Tales

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at
  • Bonds paint a hard-landing scenario for stocks
  • Equities are unfazed by hotter-than-expected inflation prints

There is a saying that all good things in life are free. This could be accurate for spending time with family and close friends, but certainly not for money.

The US Federal Reserve held rates in the aftermath of the Great Financial Crisis 07 – 09 for nearly 14 years to stimulate the economy in what became known as “zero-interest rate policy” or “ZIRP.” During that period, productivity was low, growth mild, and leverage excessive, contributing to widening wealth inequality.

Now that the Fed has moved to a “higher for longer” stance to slay the inflation beast it created in the first place from that protracted period of abnormally low rates.

Today, we’re examining the impact of the sharp increase in U.S. and global interest rates on stock market valuations.

The relentless rise in 10-year Treasury yields in the last two years, from 0.7% in August 2021 to 4.9% just last week, following stronger-than-expected jobs data. 30Y Treasuries reached levels not seen since the great financial crisis of 07-09

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Traditionally, rising yields are a worrying signal for potential economic deceleration, which, as in a domino effect, will trigger a subsequent dip in earnings per share (EPS).

The Federal Reserve is expected to continue raising interest rates to combat inflation, which could further dampen economic growth in the coming months.

International Monetary Fund confirms that growth will be slowing in most regions in its latest forecasts, citing Tightening financial conditions in most regions.

This has led even the most seasoned equity analyst to scratch his head as to why we’re experiencing a bull market instead of a bear one.

One explanation can be attributed to the insane fiscal deficits by the US government that have kept the ball rolling for the economy and the stock market.

Tech P/E’s are out of touch with Real rates.

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There was a correlation between S&P 500 forward P/E multiples and real 10-year Treasury yields, although this trend has broken in the past year. This was true until Autumn 2022 when things reversed course due to AI-driven productivity hype, strong labour market, speculations of Fed intervention to reduce yields, and renewed optimism about stock indices from many Investment banks.

Keep an eye on real (and nominal) 10-year Treasury rates. Either they need to come down a lot to validate existing forward P/E ratios, or the latter need to experience gravity to play catch up to the former.

There has been a tremendous sell-off in the Treasuries market, over two standard deviations below their mean! To put that into perspective, the drawdown in long-term treasuries is worse than the drawdown in stocks during the global financial crisis.

That oversold level has typically foreshadowed events such as the October 1987 crash of the Dotcom Bubble.

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A similar situation is with almightyTLT,” the popular ETF is also -2 standard deviations below its mean.

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However, TLT’s recent spike in volume could mean that traders have finally woken up, as the bond bloodbath has caused the ETF to fall 20% in the last six months and a staggering 50% down peak to trough since 2020. That dwarfs in magnitude even the stock market nosedive after the dot-com bubble!

And certainly, there is no shortage of dip buyers, given the insane call-option interest!

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The market is adjusting to robust macro and stubborn inflation data, namely manufacturing figures stronger than expected, job openings above expectations, and on the inflation side, producer and consumer prices exceeding expectations.

All that is causing the “higher for longer” rates stance by the Fed to cool off the economy and bring down inflation to its 2% target.

Stock prices tend to fall when Treasury yields rise, as investors become more risk-averse and demand higher investment returns.

So far, equities have held on remarkably well, especially in the face of a looming economic downturn and bleeding bond market.

However, with the latest geopolitical conflict between Israel and Hamas, spiking Oil prices, and hotter-than-expected inflation prints, namely PPI and CPI, will only add more fuel to future inflation expectations and, with it, downward pressure on the hefty equity valuations, especially in overconcentrated equity indices such as the NASDAQ 100.

Investors can bet long or short on the long-term treasury market with our TLT product 5x 20+ Year Treasury Bond , -5x 20+ Year Treasury Bond .

Market participants might go long or short the US equity indices using our 5x Long US 500 , 3x US 500 , -3x US 500 .

Traders can also trade the tech-heavy NASDAQ 100 using our 5x Long US Tech 100 , 3x US Tech 100 , -3x US Tech 100 .

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

Marketing Lead

Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Head of Communications and Strategy

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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