Melt up scenario versus perilous concentration
19:13 Share

Welcome to the Saxo Market Call. Before we get started, it's important we emphasize that the views and opinions expressed in this podcast are those of the host and guests and do not constitute investment advice or recommendations. All information provided is for educational and entertainment purposes only. All right, it is Tuesday, 1st of July, 2025, a new quarter.

And a new half of the year, even if you will, as we see markets in a very good mood. I've been talking recently about being a little bit uneasy with the scale of the risk on having a hard time finding any major divergences. But there are some that I've drummed up and we can talk about today, suggesting this might be a fragile rally.

It may not be. I think one of the key ones is a very concentrated market, but it's this very concentrated market that has taken us to where we are in the broader averages with the spectacular performance of top 10 stocks and MAG7, et cetera. A notable exception being Tesla, and we'll get to that in a moment. But some minor wrinkles or wriggles in the matrix in the –

And the plumbing, uh, VIX, uh, posting a slight rise, even though we had a new high in the equity market. I think one of the more interesting ones, um,

Again, it could just speak to concentration, but I still think it's interesting. We have the worst breadth ever for a major new high in the S&P 500. And what is breadth measured by? There's many ways to do it, but one of them is sort of the median distance of stocks to their 52-week high relative to where the aggregate index is. Again, this is just another way of saying this is a very highly concentrated market. But

It is what it is. And we can only sit back and see what happens. I think there's certainly some support for the so-called melt-up scenario, which is increasingly being thrown around. You know, that we have a

that just continues to tick along. We still have the spectacular AI investment cycle driving profits and activity in that top echelon of stocks. And we have an insanely easy, prospects of an insanely easy Fed. If Trump gets his way, his latest bashing on Powell saying the rate should be at a quarter percent to 1.75%, slightly below where it is currently. And yeah, yeah.

That's where we are with all these things. One of the things that needs to clear to get this further risk-on scenario, supposedly, is the so-called Big Beautiful Bill. Still held up in the Senate there. It may even still be meeting right now as we're here well into the European morning in Europe.

with apparently eight senators holding out on some of the terms of that version of the bill, especially the cuts to Medicaid spending is one area. At least I assume they're holding out there. Others might be wanting to cut even more to make sure that there are even more poor Americans that can't get health care as a major priority for the future and estimates of the $3.3 trillion this will cost over 10 years. Yeah.

So we have you here. Oh, and by the way, on the big, beautiful bill, the political angle here is very interesting for one stock in particular, and that is Tesla. Down some $19 to $20 per share overnight as we're seeing a really ugly exchange between Trump and Musk. Musk saying that the day that this thing passes, this ugly bill, which is an abomination, he will form a new political party called the America Party to get rid of the single party, he calls it, of the Democrats and Republicans.

And Trump's saying that if it weren't for the EV mandates, Musk would have long ago had to close up shop and head back to his home in South Africa. So it's a nice exchange there. J.P. Morgan also, in the more reality terms of what's going on at Tesla, estimating their Q2 deliveries could drop 19% year on year. So that has been hammering Tesla shares, which were already down on the session yesterday.

And I actually want to mention one more thing. Ola, I've got you in the studio, and I'm sure you're getting a bit tired of hearing me banging on about all this stuff. But I thought this recent Palantir – I mentioned a couple of times recently the small bearish candlesticks on Palantir. I like to focus on that stock because it's a very speculative stock. It's completely nonsensical valuations bordering on 100 times sales and valuation. Yeah.

It hit a massive air pocket last week, and there was no news except for some sort of re-indexing. So it was dropped from one index and added to another or something, Russell Index, et cetera. I think it just goes to show you how important this passive indexing is and that flows are the only thing that matter in this market.

And if flows are the only thing that matter, of course, what is it that can spook the flows, the passive rotating in, and what can spook systematic and active money? And apparently there's still this overhang of the systematic folks, the ones that got short on the way down during the Liberation Day tariff meltdown and then obviously have covered their shorts at some point on the way back up and have not necessarily gotten long enough.

which their systems are telling them they should be. So that could add to this so-called melt-up scenario, even though all of this risk-on makes me nervous as hell, to be perfectly honest.

All right. Over to you, Ola. We're here in the second half of the year. We've seen – important for commodities. We've seen apparently the weakest performance in the U.S. dollar. I'm not sure how they measured that. I just saw a headline. Since 1970, I think a lot of that is the timing of when this rally or sell-off on the dollar began. That should drive, you would think, commodity prices to a solid degree. What's the status here? What's the check-in for the commodity space heading into a new quarter?

Yeah, you're absolutely right, John. The dollar weakness has provided quite a bit of tailwind this first half.

We still ended the second quarter down a bit. If you look at the Bloomberg Commodity Index, which tracks 24 major commodities, it was down 3% last quarter, but still up around 7% on the year. And against that 9% drop in the dollar, that's obviously perhaps not as strong as you would have thought. But the sector that tends to benefit

mostly from a weaker dollar, it's a precious metal space, and that's obviously, they've done really well. We got silver up 23 and gold up 24, and then we have platinum up 51% on the year so far. So as we head into the second half, I think it's,

Potentially going to be more of the same. The agricultural sector is weighed down by, even though we're having these heat bombs and heat domes emerging all over the place, the key crop areas are doing just fine. And that basically means that the outlook for production of anything from sugar to cocoa, coffee and key crops are...

It looks pretty good at this point in time, and that's adding downward pressure on prices. If you look at the energy market, I think apart from another flare-up in the Middle East, this market is going to be amply supplied into the autumn, and that basically means that the upside potential is probably limited. So we're stuck in the mid-60s, and I think that's probably where we're going to hang around for a while, again, as I said, unless something really, really flares up. And then just finally, the sector, I think there's still –

potentially has the prospect of gaining further ground into the second half is the metal space, both precious and industrials. The industrials, hopefully from a solution to some of these tariffs, negotiations and uncertainties,

and the precious metals due to the focus on central banks and perhaps the lower funding rates and that situation, which is still a key source of demand from investors looking to diversify away from holding bonds. So probably more of the same in the second half. Yeah, and then specifically on gold. So I emphasized last week that this 3250 area was a really important support level on the charts.

That level survived, and I think we traded in a blip $32.45 or something like that. Nice comeback here. So it does sort of give you a risk level if you're a bull again on the gold market. Anything we should look forward to in terms of other levels or any reports or other –

Yeah. Any developments that have encouraged this besides just the weak dollar helping it back above, what is it, 33.30 I saw this morning? First off, in the short term, it is the trade negotiations, how that goes and how that may impact the general risk appetite in the market. But then I think as we head into the autumn months, the

The risk to – or the debt situation is – I think will continue to attract quite a lot of attention and then perhaps also the prospect for lower rates. So I think that those will be key drivers. Central banks have just held back a little bit recently. I think just like everyone else, they just need to get comfortable with these new higher levels and if we don't see any –

major correction then i think they will just get back in again because they are not done buying gold gold yet and as you mentioned john d that level in in gold really uh really was was key and we we held it um on that correction we had earlier well i think yesterday morning we we almost got there but that's it's holding and it's the same a similar level in silver to look out for is um

I believe it's the 32, 30 to 40 area, which has also been holding and been rejected. And we're seeing the market trading higher again today. So are we out of the budget? You said 32, sorry, you said 32, 35 or 36?

That is... 32 is too low. That's a typo. The big key chart support was 35-ish area. And I think it bottomed out 35, 20-something. 35, 50. Just above the 35 level, sorry. And it really has been a level that a lot of silver bulls has been keeping a close eye on because there's no doubt that when we broke 35, it attracted a lot of momentum buying and it attracted a lot of attention, headlines.

So there is a lot of fresh new longs that have entered the market in that area. So we need to hold that in order to avoid a bigger correction. But we're heading into a period where liquidity is going to be fairly low. That does not mean volatility has come down as well. The opposite can happen. I have been away in July and come back to a significant change in the price. So let's see. But fundamental, the reason why we're up here is...

which has happened, unfolded over the last two years, I don't really see any of those reasons having faded to the extent that we can call a top at this point. No, I think you point out a couple of things that are important. And I would connect that actually with Trump's nomination of a new Fed chair. If that happens, for example, you talk about when we're away. Well, we're not away there. At least I'm not. End of July FOMC meeting if Powell and company don't cut their deal.

It seems like it queues up the timing of Trump getting angry and actually doing that early appointment or something like that. And that could be the next interesting chapter for gold as well as the dollar. But you also brought in the whole trade issue.

Situation in geopolitics, really critical here. We have the EU seems to be sending out signals that it's going to be okay with this baseline 10% tariff rate from the U.S. It's still grappling, though, with the 25% on automotive and the 50% on the steel and aluminum, and it's probably looking for some kind of U.K.-style carve-out and looking for carve-outs in areas like pharma, alcohol, semiconductors, and aircraft.

And then we have also in geopolitics another warning, a specific warning from China about, like, if you're making these trade deals with the U.S., that's all fine and good. But if you're talking about excluding China in any way, that this is something we will have to address directly. So, again, the geopolitics of all this is by no means wrapped up.

Let's switch over to the U.S. dollar a little bit. So it's, of course, weakening further. We saw Eurodollar teasing above 118 at one point overnight. Dollar-yen, just really tough to trade. It backed up after what seemed to be an interesting sell-off yesterday. May have been end-of-quarter related. Backed all the way up to 144.50, but now is trading well below 143.50 in a local low this morning.

Which makes a hell of a lot more sense to me, given that we have these long U.S. yields cratering once again. We posted the lowest 10-year benchmark yield overnight since I believe it was May the 2nd, getting into some interesting territory ahead of the likes of the employment report up on Thursday.

Aussie dollar also managing a new high, but it's done that so many times over the last couple of months without really getting some new fresh impulsivity. I've talked about the difficulty of the Australian dollar in Australia's geopolitical, you know, the situation for Australia geopolitically with its lying across two ugly fault lines, one economic linked to China and other one defense alliance linked to the U.S. That's going to be a tough one.

Elsewhere, I just would note that while the U.S. yields have been falling quite heavily, so we have German yields sticking in there and even rising to local new highs. If you look at the 10-year bond, that is that fiscal signal, and we're seeing quite a tightening in the U.S.-Germany yield spread. It's down to a negative 139 basis points there.

Sorry, negative 160 basis points. That is a lot tighter than it was just a couple of weeks ago, but not yet as tight as the minus 139 basis points, which is the tightest it's been in a long time. That was around the time of the awareness that Germany was set to launch this big fiscal mobilization. So that trend is supportive of Eurodollar. What could disrupt the weak dollar? I would suggest just something that changes the market narrative drastically.

Right now, we're sitting here very nicely in the middle of the so-called dollar smile. The dollar smile, if you don't know, is about what – there are two sides of what takes the dollar higher. One is ugly risk off across global markets traditionally. The other being if the Fed is tightening yields viciously. Those are the two dollar negative scenarios. And the middle is sort of when global markets are relatively happy.

And we have a risk on – and especially now that we have a Fed that's – well, the Fed itself is not that dovish. The anticipation is that it's going to be forced to continue to lower yields, especially if Trump gets his way beyond May of next year. So –

And then finally in FX, I will mention Eurostocky. So Euro-Swedish krona got into a pivotal area just below this 11.20 to 11.25. It is the existential zone, if you believe, in the stronger Swedish krona as a sort of multiplier on the potential strength going forward of the European economy on fiscal expansion.

Sweden has a number of solid industrial companies. It's traditionally quite leveraged to its export economy. However, rate differentials have not been cooperating, and that has been the chief driver of this backup into the above 11 and then even above 11.15 at times in recent days. So a critical area there. I like the idea of a stronger Swedish krona longer term, but there could be some shenanigans if it gets above 11.20 to 11.25 first.

Data today, we've got the Eurozone flash June CPI that will have some weight in terms of how solid the market feels in pricing the ECB to do its one last cut and then pausing for a while. The tiresome jolt survey from the U.S., both late and poor quality, but it gets market reaction. It's up today, as is the ISM manufacturing. And then we have the ECB Centra conference ongoing. And remember, Thursday is a jobs report day this week.

I'll close out just with a note on Apple. A couple of interesting stories. So it had a strong day yesterday. Apparently that linked to some news about having a deal with OpenAI to have better access to

AI into series search and chat function. So important for them. This whole AI vulnerability has been a big angle for Apple. As you recall, I linked to a Stratechery interview talking about Apple may need to go further than this, according to them, and do some kind of major AI acquisition.

But this is a sensitive topic for Apple. This boosted the stock yesterday. But there was also not getting as much coverage, but interesting. And you have to park it in interesting and who knows. It sort of belongs in the sort of Damocles zone because you don't know if this sort is ever going to drop. The Justice Department in the U.S. has a antitrust suit out against Apple.

or investigation. This is one of those things that just kind of is ongoing. And yesterday, Apple officially losing a bid to have this antitrust suit dropped. And it's all about access to Apple's hardware and software features. And really as, you know, as that book I mentioned recently,

on Apple in China where hardware tech is increasingly going to become less relevant. So the whole early days of the iPhone, if you recall, it was always the Apple that was the status symbol. It was the latest, most sophisticated hardware.

And that growth is basically over. So it's a steady business, a profitable one, but it's a steady business. And all the growth is coming from services. And all of that services is linked to this moat, these high garden walls around the whole hardware and software industry.

A monopoly that Apple has and can charge for at the App Store, et cetera. So basically as a consumer, if you're staying within Apple going forward, you're just essentially a chump in monopoly land enjoying your Apple services that you know well and not wanting to bridge to a new user interface and new paradigm for doing stuff. But there's no real –

There's no real benefit, I think, relative status benefit, unless somehow Apple manages to retain that status benefit. And they do do a good job of making sure there's interconnectivity with their various hardware devices and the software experience, etc. But a huge threat if this gets broken apart, of course, by a Justice Department suit. Something to watch. And that was my final note or final story for the day.

I will return tomorrow with a full podcast with Slide Deck, all singing, all dancing, doing that as a go-away before I leave on holiday on Thursday. So that will be the last podcast tomorrow for about three weeks. But, of course, we will be back on the other side of my holiday. Yeah, so we'll be back tomorrow with the final edition until later in July of the Saxo Marco podcast.