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Vermilion Int'l Compass: Global Equity Strategy

Still Favor Defensives Until Market Dynamics Improve

Since late-February (2/25/25 Compass and 2/27/25 Int'l Compass) we expected an 8-10% pullback to provide a buying opportunity. But that all changed last week (4/1/25 Compass and 4/3/25 Int'l Compass), when we downgraded our outlook to bearish/cautious, citing several concerning developments. It all led us to believe a break below 5500 on SPX and $115 on ACWI-US was increasingly likely; a historic selloff ensued. With that said, the 90-day pause announced yesterday sparked a significant rally in global equities, and there is at least a possibility that the lows for this pullback are in, and a V-shaped recovery is possible. With this in mind, we still believe the more likely scenario is that the market has trouble finding a solid footing. Therefore, we remain cautious and we continue to favor defensives as long as the S&P 500 and ACWI-US are below their 200-day MAs. We would like to see market dynamics improve and more evidence of a sustainable bottom before getting more constructive.

Remain Overweight Germany/Europe and the U.S. We remain overweight Germany (DAX), broader Europe (EURO STOXX 50), and the U.S. (S&P 500). In our Int'l Macro Vision (3/25/25) we discussed how, considering the rate of outperformance YTD from Europe and Germany, we would not be surprised to see that moderate as Europe is rather extended. We reiterated that Europe/Germany could continue to pull back last week (4/3/25 Int'l Compass). Now, the EURO STOXX 50 futures are indicating an open around 5000 at the time of writing; 5000 is crucial resistance -- a break above it would be bullish, but we would expect some consolidation/pullback below it first.
Concerns Persist. MSCI EAFE and MSCI ACWI ex-US (local currency) violated their major 9-month base supports, which we discussed last week would be quite bearish. They are testing next supports which appear to be holding for now. U.S. high yield spreads remain elevated (and way above the key 355bps level) despite narrowing some yesterday. Defensive Sectors including Staples (KXI-US) and Utilities (JXI-US) displayed significant RS pullbacks yesterday, but their 2+ month RS uptrends remain intact. We need to see these RS uptrends break down and for high yield spreads to narrow in order to believe the market has established a reliable bottom. In terms of Japan, we would look for resistance at 2610-2630 on the TOPIX... see pages 2-4.
Actionable Themes: Gold Miners, Staples, Insurance, Communications, and Utilities. We continue to favor defensive-leaning areas