The equity maket sectors are getting more disperse

Using the v-Lab data, we are seeing that correlations across sectors in the US are falling and showing more dispersion. If the stock market, like all markets, can be viewed as a network, we are seeing the network expanding after a period of strong connection in the first quarter of 2025. We are seeing a disconnect in the IT sector but also across real market sectors. This can be viewed as a market for stock pickers.

 

Gold taking up the slack of lower dollar central bank demand

At some point, the fiat money producers will believe that fiat money is losing its value. There will not be an announcement, but there will be a slow adjustment. Look at the reserve assets held. Central banks are expected to reduce their exposure in dollars. They have already seen an increase in gold holdings. Now you have to be careful when looking at gold, because a large percentage of the increase in reserve exposure is not from more tonnes of exposure but through an increase in price. 

That said, most central banks as of mid-June expect that gold will move moderately higher even after the poor second quarter. Will we see the highs from January and February this year? Unlikely, but there is more upside than downside for gold in the second half of the year. 

 

Monetary policy uncertainty relatively stable

Everyone in the bond markets has been talking about Fed Chair Warsh and his changing views on forward guidance. His policy stance is clear. He does not want to give forward guidance. He will reduce guidance to the minimum. Markets have reacted to this with much wailing, yet we need to focus on the actual impact on markets. One way to look at this is through market-based measures of monetary policy uncertainty. We have a history through an index created by the San Francisco Fed. The data suggests there was a spike when Chairman Warsh was appointed but has been relatively stable for the last few months. Overall, the Warsh regime is showing higher uncertainty, but the levels are not at extremes. Nevertheless, there should be concern not for the short run but for numbers that are closer to 24 months. Longer-term uncertainty is always higher than shorter forecasts; however, there needs to be focus on what investors are thinking beyond 2026. 

 

Korean KOSPI - the bubble market has burst

Sometimes the bubble burst will sneak up on you even if it is in plain sight. The Korean KOSPI index is down over 44% in approximately 40 days, with over 300,000 individual leveraged accounts liquidated and over 1.2 million accounts receiving margin calls this month. 

The index was about 45-50 percent information technology, with the largest exposure in Samsung and SK Hynix. The problem for the US is that the IT sector is globally integrated, so events in South Korea are not just a local event. Clearly, there has already been some spillover, but the real fear is a contagion that would require valuations for this sector around the globe to be reset. 

You can already see the spillover when we compare the one-month returns.