Japan Shines Bright While US Markets are Reminiscent of the Dotcom Era

The brightest ray of sunshine in global markets came from Japan. Q1 GDP growth was seen to be much stronger than expected, at +1.6% annualised. It propelled the Japan Topix equity index to new highs. Elsewhere in Asia, however, China experienced deceleration.

On the other side of the world, industrial production data for the New York area of the US showed an outright decline. Europe was equally disappointing, following a similar downward trajectory.

AI Emerges as the El Dorado of Tech

At the moment, though, economic data and corporate earnings are taking a back seat. It's the rather strong momentum seen in equity markets that is in the limelight. This is entirely due to the mega-caps, which have been driven by the buzzwords “AI” and “CatchGPT”.

The discovery of what is potentially a new El Dorado is pushing valuations of Google, Microsoft, Meta, and the likes to new highs.

US Markets Experience Dotcom Déjà Vu

It is a little reminiscent of the Dotcom bubble back in 1999 to 2001, albeit with companies with proven earnings power: Nasdaq was up 3.5% this week! Other US markets were also up, though more conservatively at around 1% to 1.5%.

Europe followed suit with a new all-time high for the DAX at +2.5% on the week and +1% to 2% on the other markets.

Financial Conditions Tighten and Employment Remains Strong

Fixed income markets continue to show a disconnect with equity markets. Yields were on the way up in the US by close to 20 basis points (bp) from the prior week, as expectations of rate cuts over 2003 are being unwound.

St. Louis Federal Reserve President James Bullard advocated new rate hikes. However, US Fed Chair Jerome Powell came out more equivocal Friday night, stating that financial conditions are tighter as a result of the banking crisis.

Nonetheless, doubts remain whether the Fed can lower rates again since the US consumer remains extremely resilient and employment is very strong. As I have mentioned in earlier articles, these are hurdles for inflation to come down, perhaps forcing the Fed to hike again.

Fixed Income Trumps Equity Returns

Comparative valuations between fixed income and equities show the latter getting rather pricey. Putting it simply, an investor can get a return of 4% to 5% in USD in fixed income that is now as high or higher than the dividend yields or expected returns of most equities.

Of course, this can last a while longer, and fixed income yields could go lower should inflation diminish while equities and economic performance do not degrade from current conditions.