Conservative Portfolio

Disclaimer

This document is a marketing material and is for informational purposes only and must not be construed to be an advice to invest or otherwise in any investment or financial product. JSK does not guarantee as to adequacy, accuracy, completeness or reliability of any information or data contained herein and under no circumstances whatsoever none of such information or data be construed as an advice or trading strategy or recommendation to deal (Buy/Sell) in any investment or financial product. JSK is not responsible or liable for any result, gain or loss, based on this information, in whole or in part.

Data Source: Bloomberg

Portfolio Snapshot

Total Investment Value - $250,000

Leverage - 2x

Portfolio Allocation

• Bonds: 55%
• Indices: 20%
• Gold: 25%

Bonds

Euro Buxl

In its most recent meeting on July 18th, 2024, the European Central Bank opted to maintain interest rates at 4.25%, aligning with market expectations. Looking ahead, the latest Eurozone CPI report revealed an inflation rate of 2.6%, slightly above the forecasted 2.5%. The primary driver behind this uptick was a significant rise in energy inflation, which increased by 1.3% in July.

A key area of concern for ECB policymakers remains services inflation, which, despite being the most persistent pressure, saw a slight deceleration from 4.1% in June to 4% in July. This marked the first slowdown in three months. Economists suggest that this modest decline in services inflation may be sufficient for a rate cut in September, which is currently viewed as the base case scenario by many economists. As of now, market participants are pricing in a 93.8% likelihood of a rate cut in the upcoming September meeting.

The report also highlighted that the price growth for food, alcohol, and tobacco decelerated to 2.3%, while the cost of other goods saw a slight increase, rising by 0.8%. The core inflation measure remained steady at 2.9%. This steadiness surprised some economists who had expected a slight decrease in core inflation. The unexpected stability was attributed to increased container shipping costs, which temporarily pushed up goods inflation. However, analysts believe the ECB may not be overly concerned about this, as futures markets indicate that the spike in shipping costs is likely temporary.

Overall, economists anticipate that inflation will continue to moderate, paving the way for potential interest rate reductions. This outlook supports a positive sentiment for Buxl prices, as easing inflation and lower interest rates typically bolster bond markets.

Furthermore, given the recession fears in the US, if the Fed decides to cut interest rates, the ECB could follow the same.

Regression Analysis

Regression analysis is a useful tool to assess the strength of relationships between different variables and for modeling how these relationships will evolve in the future. The model below is used to forecast the movement in the Euro Buxl’s price when the 30-year German Government yield changes.

Technical Perspective

From a technical perspective, Buxl experienced a breakout from a wedge formation. Additionally, a breakout from a bull flag pattern has been observed, which reinforces the bullish momentum in bond futures. The breakout has also been retested, confirming the upward trend. The target level is identified at 155, where a strong Fibonacci confluence from a retracement and projection aligns. Meanwhile, the 130-price level serves as a significant support zone.

U.S. T-Bond Ultra

At the July FOMC meeting, the Federal Reserve kept interest rates steady at 5.25% to 5.50%, as expected. Notably, the post-meeting statement highlighted that inflation remains only somewhat elevated, and job gains have moderated. Fed Chair Jerome Powell hinted at a potential rate cut in September due to risks associated with weakening labor market conditions.

Inflation has improved significantly, dropping from a peak of 9.1% in June 2022 to 3% YoY in June 2024. Although still above the Fed’s 2% target, this marks the first month-over-month decline since May 2020. Uneven disinflation is evident in economic reports: Q2 2024 GDP likely accelerated to 2.8%, core PCE inflation held steady at 2.6%, and annual PCE inflation fell to 2.5%.

Despite robust job growth, the labor market has eased. The unemployment rate rose to 4.3%, and wage growth slowed. Payrolls posted an increase of only 114,000 versus an analyst consensus of 175,000. In line with this, markets anticipate rate cuts later this year to support the economy. According to the CME Fed Watch Tool, there is now an 85% probability of a 50 basis point rate cut in the upcoming September meeting. This marks a significant increase from just a month ago when the probability stood at only 5.50%.Additionally, markets are factoring in the possibility of a recession early next year, leading to expectations that bonds will outperform other assets making U.S. T-Bond Ultra an attractive investment opportunity.

Regression Analysis

Technical Perspective

From a technical perspective, T-Bond Ultra experienced a breakout from a wedge formation. The target levels are identified at the 144-146 price level followed by 155-157 price level, where a strong Fibonacci confluence from a retracement and projection aligns. Meanwhile, the 125 and 122 price levels serve as a significant support zone.

Indices

S&P 500 Index

The S&P 500 is arguably the most important stock market index. It tracks the 500 largest U.S.-based companies. The index has surged 14.7% YoY buoyed by signs of economic resilience, robust Q1 corporate earnings and upbeat guidance for upcoming quarters. The top 10 constituents make up 34% of the index and include companies like Apple Inc, Microsoft Corp, Nvidia Corp, and Amazon.com Inc. Recently, the index has been experiencing a major pullback due to `"`The Great Rotation,`"` as investors and hedge funds shift their focus from overvalued tech stocks to defensive sectors poised to benefit from the evolving macroeconomic landscape.

Adding to the pullback was July’s jobs report, which revealed a weakening labor market. The U.S. economy added just 114,000 nonfarm payrolls, registering one of the weakest prints since the pandemic. This sparked concerns about a potential economic downturn amongst investors. Moreover, the unemployment rate rose to 4.3% in July from June’s reading of 4.1%, effectively breaching the trigger for the Sahm Rule, which is a closely watched recession indicator. Meanwhile, Even U.S. manufacturing activity, measured by the PMI reading, slid to 46.8 in July, marking its steepest contraction in eight months.

What the markets are experiencing now is an unwinding of the bullish positioning which resulted in such a strong rally in H124. However, stocks are expected to find their footing and recover as inflation declines and GDP grows. With the heavy weights of the index being fundamentally strong companies, any selloffs present a good buying opportunity in anticipation of economic recovery in H224. The S&P is currently trading at $5,186 and has a P/E of 22.7. Its expected earnings for 2024 are $244.07. The index P/E ratio fell to a support level of 20.6x in 2019, 2023, and 2024. By multiplying the P/E with the expected earnings we get a support level of $5,027, which can serve as a good entry point for exposure to the index.

Nasdaq Index

The Nasdaq 100 is a stock market index that includes 100 of the largest non-financial companies listed on the Nasdaq Stock Market. It is a tech-heavy index, with significant weightings in the technology and consumer services sectors. The index has outperformed the majority of the indices across the globe and rose 16% YoY driven by a surge in tech stocks. However, in the past month Nasdaq 100 has fallen 7% due to a tech sell-off and sector rotation from large cap to small cap. This is driven by the fact that investors believe the tech sector valuations are stretched. Moreover, July’s job data suggested a weaker than expected jobs market which intensified the selloff due to recession fears.

Nonetheless, the Nasdaq 100 remains a robust and influential index, heavily influenced by the performance of major tech companies. While economic and geopolitical uncertainties present challenges, the continued innovation in technology provides a positive outlook. Looking ahead analysts remain bullish on the index, driven by the strong balance sheet and long-term growth prospects of the technology sector and any dip in the index can be seen as an attractive opportunity.

The Nasdaq 100 is currently trading at $17,895 and has a P/E of 28.8. Its expected earnings for 2024 are $672.5. The index P/E ratio fell to a support level of 26.2x in 2021, 2023, and 2024. By multiplying the P/E with the expected earnings we get a support level of $17,619, which can serve as a good entry point for exposure to the index.

Gold

Following a near two-year hiking cycle that drove Fed fund rates to a 22-year high point, markets are anticipating the arrival of the first rate cut in the second half of 2024. The Federal Reserve has signaled rate cuts contingent upon inflation easing from the 40-year high observed in mid-2022.

Historically, it has been observed that gold tends to outperform during the beginning of the rate cut cycle and through the cutting cycle.

The table above showcases gold price performance through the rate-cutting cycle.

The table above showcases gold price performance from peak rate to first rate cut.

During the last three historical time periods between peak rate to first rate cut, gold clocked in an average price appreciation of 11%. Moreover, during the last three rate cut cycles, the average price appreciation of gold was about 33%. Considering the historical trends, the conviction for a bullish forecast for the remainder of 2024 appears to be strong with potential for gold to see an upside ranging between 35% to 40%.

Market Analysis

In July, the pace of job creation in the US decelerated noticeably. Last Friday, the Nonfarm Payrolls print clocked in at 114,000, falling short of the anticipated 175,000. The unemployment rate rose to 4.3% from 4.1%, while wage growth moderated. Additionally, the annual growth in Average Hourly Earnings slowed to 3.6% from 3.8%. The labor market, typically a lagging indicator signaling economic downturns, has shown signs of weakness. The latest Nonfarm Payrolls (NFP) report, with a lower-than-expected increase of 114,000 jobs, coupled with rising jobless claims, has fueled recession fears. Consequently, markets are pricing in a significant 50-basis-point interest rate cut at the September Fed meeting. The prospect of lower interest rates remains a positive force for non-interest-bearing assets like gold along with increased interest in gold for its safe-haven appeal during uncertain times.

While the impending pivot of Fed on rate cuts fuels the current gold surge, other factors contribute to its strength. Central Bank purchases of gold, during two consecutive years in 2022 and 2023, have exceeded 1000 tonnes per annum in comparison to a mere 450 tonne per annum purchase in 2021, following the Ukraine war. Despite China putting a pause on its buying spree, central banks in emerging countries are expected to continue purchasing gold.

Market analysis suggests a 64.94% probability of a Trump presidency in 2024, which is anticipated to positively impact gold prices. During Trump's previous term, from January 20, 2017, to January 19, 2021, gold prices surged from $1,209 to $1,839. This substantial gain was largely attributed to Trump's impactful actions that reshaped the geopolitical landscape both domestically and internationally. Under Trump, known for his protectionist stance, the U.S. dollar could weaken further as he pushes for a more competitive currency. This would likely boost gold prices, which are already nearing record highs, as gold traditionally benefits from a weaker dollar. The combination of potential rate cuts, central bank purchases and a weaker dollar under a Trump administration would provide a strong tailwind for gold.

Testimony of Our Distinction!

This document is a marketing material and is for informational purposes only and must not be construed to be an advice to invest or otherwise in any investment or financial product. JSK does not guarantee as to adequacy, accuracy, completeness or reliability of any information or data contained herein and under no circumstances whatsoever none of such information or data be construed as an advice or trading strategy or recommendation to deal (Buy/Sell) in any investment or financial product. JSK is not responsible or liable for any result, gain or loss, based on this information, in whole or in part.