By Sam Boughedda
In a note focused on US equities, a Jefferies analyst stated that companies with high foreign revenues are likely to be more challenged than their domestic peers.
“US financial conditions deteriorated last week led by a sell-off in credit,” stated the analyst. “There has been a remarkable drop in the number of companies raising prices. The risk for our sector allocation and bias is not necessarily a recession but if US real wages meaningfully improve forcing the Fed to raise rates higher thereby putting pressure on multiples.”
He added that the firm has closed out their “style mis-pricing (Long Dividend Aristocrat vs MSCI Momentum) initiated on 5th April, 2022.”
“We have been too early on the Basket of stocks benefiting from a weakening dollar and an improvement in US financial conditions. We have chosen to keep them given that we are somewhere close to peak ‘pessimism’. We recently reinitiated a Long position in equity volatility. We open a position to switch away from companies with high foreign revenue,” he said.
“The market has by and largely discounted a 75bp hike this month (Jefferies 50bp). The US OIS curve has moved to a peak of ~3.75% from 3.4% one year hence over the past month of trading. Furthermore, it should be remembered that a 10% move in the trade-weighted dollar is equivalent to a 50 to 75bp US rate hike. Hence financial conditions are tightening rapidly again. In another sign of pessimism, the Conference Board CEO Business has plunged to pandemic lows. Sentiment remains decidedly Bearish,” the analyst added.
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