02 Jun 2nd June 2025
Index Movement Last Week
| S&P500 | +1.9% |
| Nasdaq | +2.0% |
| Aussie ASX200 | +0.9% |
May was an exceptionally good month for US and global equities. The US outperformed but every major developed and emerging economy equity index posted positive monthly returns.
Why?
Mainly because the markets have decided that TACO is true (this is a term coined by the U.K’s Financial Times – Trump Always Chickens Out) and the Trump playbook is to announce big tariffs then settle on something much smaller.
Mind you, that could now be at risk because a stupid reporter raised it to Trump in a press conference. I doubt he would have taken that well.
Markets are now pretty much back to where they started the year after the disasterous moves following the “Liberation Day” tariff announcements and tariffs got more exciting last week.
A case brought in the Court of International Trade ruled that the president exceeded his authority by imposing tariffs. The Court decided he did not actually have the power to do so using the emergency power act and they ordered a permanent halt.
Trump immediately appealed the decision which means it is now likely to end up in the Supreme Court. What they decide will be interesting. Do they support the President or do they go against him to show their independence and power? I suspect the later.
This whole tariff story has been an interesting one and has played out in the classic traders manner of sell first and ask questions later.
If the tariffs end up staying, and also end up around the 10% mark – it will make no significant difference. It isn’t that different to our 10% GST and nothing bad happened when we introduced that. Why should this be any different?
It is very easy to lose focus as a stock investor. The headlines said “here is something new that we don’t know but could be bad”. We then saw our stocks fall in price quickly. That sets up a negative emotion and fear kicks in. The media know you are feeling this fear so then write stories to take advantage of it and get more eyeballs on their product so they can sell more advertising. All of which re-inforces our fear and we start creating negative long time scenarios in our minds. Then comes the decision to sell out. Usually at the bottom.
This is why we try to be more objective in our weekly newsletter and give you an alternative view.
Here’s an example of what the media has not reported to you. Earnings season is basically over. 473 companies have reported.
Of those, how many do you think mentioned tariffs as a reason for lowering or removing future profit predictions?
Think about it. You are the CEO of a company and need to give a projection for your profits for the rest of the year. Do you guide high and therefore set a high bar for yourself to exceed? Or do you say “these tariffs could have an impact so we are lowering guidance” and set a low bar?
I (and I suspect most of the market) was expecting negative guidance numbers from the majority of CEOs. I thought they couldn’t miss the opportunity to lower the bar.
So, back to the question – how many of the 473 mentioned tariffs in a negative way?
Answer – just 8.
When CEOs are not making their lives and targets easier then there really is nothing to be concerned about.
The Decline of the USD?
As you know, we trade a lot of options here at Capital 19. There are two types of options, Calls and Puts. If you think something is going up you buy Calls, down buy Puts.
One thing option traders do is compare prices of Calls to prices of Puts. This is called skew.
As option traders, we watch this and when we notice it reach extreme levels it tells us something about the underlying asset.
We looked at the skew of FX options recently, with the underlying being the US Dollar and option markets are pretty bearish on the long term USD right now.
This graph is how the skew has changed in one-year out of the money options since 2006
As you can see, this market is about as bearish as it ever has been over that timeframe.
What does it mean?
The option market thinks the AUDUSD rate will appreciate over the next year and they are about as convinced of this as they ever have been.
Impact?
If you hold US assets these assets will depreciate in AUD terms.
Context is of course important. This is just one market indicator. Long-term and relatively low-delta FX options are not a highly liquid market, and just because they’re pricing an outcome doesn’t mean it will come to play.
Aussie is at the highest point for 2025, it is up some 6% from its lows (if we ignore the two weeks of tariff induced mayhem), and is trending higher.
If anyone is concerned Aussie might appreciate more and would like to hedge their portfolios against this risk – give us a call. It is easy to do and costs very little.
Fund/ETF Money Flows
The Investment Company Institute publishes weekly fund flows – money coming into and out of managed funds and ETFs.
This is important because there is only one thing that pushes assets higher – more buyers than sellers.
In the week ending May 7th, Equity Funds saw net sales of $16.7billion. It has been a bit up and down over the last 4 weeks but on average the prior 4 weeks has seen an average of +$4.7bn. So last week all they money that came in over the past 4 weeks pushing stock prices higher, came back out of the market.
What does it mean?
It could indicate fund investors do not believe this rally will last much longer and are taking profits at the top. But, it also means, if the rally holds, there is all this money on the sidelines to come back in.
New highs anyone?
We go into June with good momentum so their is no reason we cannot see further gains this month,.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.