The Australian monthly CPI came in at 6.8%, surprising on the downside compared to the expected 7.2%. This news triggered a global rally in risk. The data revealed that the rise in electricity prices went up by 17.2%, indicating a complete failure of energy policy in Australia, which has the 2nd largest energy endowment on the planet. However, the clear trajectory in CPI is down, and the RBA may be done with the rate rise cycle.
The Fed’s rapidly expanding balance sheet is leading to liquidity finding its way back into equities. The old “bad news is good news trade” is back on, with markets now strongly believing that the “Fed put” is back in play. US equities had a very strong session, with the S&P500 regaining the 50-day MVA and now comfortably above the 50, 100-, and 200-day MVA’s. This is important in terms of momentum-based CTA flow. For the record, the Dow gained +1%, S&P500 +1.4%, Nasdaq +1.8%, and Russell 2000 +1.1%. The VIX dropped -4.4% to 19.1. Real Estate (+2.3%) and Tech (+2%) led the market, while Healthcare (+0.3%) and Staples (+0.5%) lagged in a classic “risk on” move. With hedge funds running low gross positions and record amounts of cash flowing into Money Market Funds, the path of least resistance in equities is higher.
We are also seeing earnings surprises from large-cap US equities, with Lululemon (LULU +12.7%) and Micron Technology (MU +7.2%) delivering last night. European markets had a good night, celebrating the return of Sergio Ermotti to run UBS (UBS +4%). The Stoxx50 rose +1.3%, led by Tech (+2.7%), REITS (2.6%) and banks (+1.9%). Deutsche Bank (DB +2.5%) has also stabilized. As an asset class, equities are looking promising, and clients should be sensibly and selectively putting cash to work. It’s best to be bearish on cash as cash rates peak.
At a stock-specific level, the focus is on adding high-quality global and local businesses with limited downside. In this regard, it’s worth revisiting the investment case for Walt Disney Co (DIS.US). The share price has fallen to where it was five years ago and currently trades on undemanding multiples. However, there is a clear catalyst for value release in the reinstatement of Bob Iger as CEO alongside earnings that have bottomed.
Disney reported F1Q23 results above consensus and introduced a $5.5 billion cost savings target, outlined a new corporate structure, and pointed to rationalizing its streaming business to put it on a path towards sustainable, profitable growth. DIS reported F1Q23 revenue, segment operating income, and Adj. EPS above consensus, with strong performance at the Disney Parks, Experiences and Products segment (DPEP), which reported 1Q23 EBIT 18% above consensus. Disney+ paid subscribers were in line with consensus, and DTC operating income improved sequentially, beating estimates. The management maintained its 2023 outlook pointing to high single-digit revenue and segment operating income growth, introduced a $5.5 billion cost savings target, and announced a new corporate structure consisting of three segments: Disney Entertainment, ESPN, and Disney Parks, Experiences and Products.
