Low risk premium | 08 9月 2023

#SP500:

The increase in interest rates in recent months has left equity valuations more challenged. Based on the Equity Risk Premium, the SP500 Index offers very little additional compensation for equity investors relative to fixed income, which offers some of the most attractive yields in decades. The ERP compares the earnings yield on the SP500 to the 10-year US Treasury yield. The inverse of 22 gives us an earnings yield for the S&P 500 of about 4.5%. We can then compare that 4.5% number to the 10-year Treasury yield. The 10-year yield is trading at 4.18% currently. The SP500 ERP of 0.4% is low but not much below the long-term average of 0.7%. However, 0.4% is the lowest the ERP has been since before the 2008-2009 financial crisis. Essentially, the SP500 Index offers very little additional compensation for investors to take on equity risk relative to fixed income, which offers some of the most attractive yields in decades.

Trading recommendation: sell 4515 and take profit 4325.

XAUUSD:

The labor market is slowing in response to the U.S. central bank's hefty rate hikes to cool demand in the economy. This is probably the final nail in the coffin for the chances of another rate hike by the Fed in September. Wage growth moderated last month. Average hourly earnings climbed 0.2%, the smallest rise since February 2022, after gaining 0.4% in July. In the 12 months through August, wages rose 4.3% after increasing 4.4% in July. Wages are still rising faster than the 3.5% pace that economists say is consistent with the Fed's 2% target. As fewer people quit their jobs in search of greener pastures, wage growth could continue to trend lower. This is a negative signal for the dollar and a positive one for gold, as these assets have an inverse correlation.

Trading recommendation: sell 1950 and take profit 1900.

#WTI:

Oil prices rose to their highest in over half a year and snapped a two-week losing streak, buoyed by expectations of tightening supplies. Saudi Arabia is widely expected to extend a voluntary 1 million barrel per day oil production cut into October, prolonging supply curbs engineered by the Organization of the Petroleum Exporting Countries and allies, known collectively as OPEC+, to support prices. The appetite for oil in the United States has been robust, with commercial crude inventories declining in five of the most recent six weeks, according to surveys conducted by the U.S. Energy Information Administration.

Trading recommendation: buy 84.15 and take profit 87.00.