Investing.com - The aftermath of last week’s U.S. jobs report saw equities rally even as rates reset higher and cuts got pushed further out, noted JPMorgan, resulting in equity markets becoming even more disconnected.
The Labor Department said on Friday that the U.S. unemployment rate ticked up to 4.0% for the first time since January 2022, while nonfarm payrolls increased by a hefty 272,000 jobs last month, suggesting the Federal Reserve may continue holding off starting to cut interest rates.
“We see diminished prospects for easing this year, and now expect the first Fed cut only in November,” said analysts at JPMorgan, in a note dated June 10.
Yet, equities continue to see demand, as investors appear to be ignoring a plethora of risks, “including politics (which roiled a few emerging markets last week, sending a warning sign for this year’s remaining elections), geopolitics, the narrow market concentration, the surge in meme stock and crypto trading that may signal froth, still elevated inflation/rates, and a number of macro signals that are pointing to elevated risks of an economic slowdown or recession.”
“Despite these abundant risks, equities continue to trade around record highs, and investor sentiment and positioning are elevated,” JPMorgan added.
Taking this into consideration, the bank has a defensive tilt to its model portfolio, with an underweight rating in equities and overweights in commodities and cash.
It has also closed its overweight stance in euro area versus U.S. bonds, as European Central Bank easing expectations could be pushed out on persisting inflation pressures and stronger data.
That said, looking at individual equity markets, JPMorgan favors the domestic-leaning FTSE 250 over the more international influenced FTSE 100 ahead of the U.K. general election, as the FTSE 250 tended to perform better once the Bank of England starts easing and against the backdrop of better domestic activity momentum.
The U.K. equity market is trading cheap, is a low beta play, has China exposure, and the highest dividend yield out of all large developed markets.
Elsewhere, “we see the next leg up for Chinese equities aided by better housing data over June/July and stabilizing macro data.”
Turning to Japan, the country’s equities have underperformed Europe and U.S. due to the weak yen, but acceleration in corporate reforms is a medium-term positive.
“We believe that the weak yen pressure will peak out in the coming months as the Fed lowers interest rates and the BOJ raises rates. We expect Japanese equities to start performing more strongly in 2H 2024, supported by corporate earnings and reforms.”