HIGHLIGHTS
US equities rallied significantly this week after the release of positive economic data. Nasdaq outperformed S&P500 as technology stocks were leading the way. Volatility retreated with VIX dropping from last week’s peak 65.7 to 14.95 this week.
China: The activity data in China is weaker than expected. There is a decline in property prices, fixed asset investment and industrial production. The weak domestic demand reinforced the view that further fiscal easing in consumption and housing will be important to stimulate growth.
Resilient Economy: Although the recession fears were rising, the latest economic data suggested the opposite. Inflation came in lower than expected and is likely to achieve the Fed's inflation target. Retail sales in July are strong, indicating the strength in consumer spending. Jobless claims dropped and market rallied again.
Election: The prediction market odds of a Democratic sweep are now slightly above Republican (28% vs 24%). Democratic sweep will result in corporate tax increase and a potential decline in S&P500 earnings per share. In contrast, tax cuts would be possible if there is a Republican sweep.
MARKETS
17,631.72 | +5.29% | |
S&P 500 | 5,554.25 | +3.93% |
Dow | 40,659.76 | +2.94% |
10-Year | 3.89% | -5bps |
Brent | 79.63 | -0.14% |
DXY | 102.40 | -0.73% |
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Equity
Goldman Sachs: There is a downside risk of earnings because of the risk of recession. However, profit margins usually drop ahead of recessions historically, while margins have been rising recently. We only assign 25% likelihood that US economy will enter a recession in the coming year.
Morgan Stanley: Excessive volatility can create mispricings, and thus opportunities. We are opportunistic buyers when the Japanese stocks are near recessionary valuations, and the fundamentals are still strong.
Fixed Income
Standard Chartered: After the weaker than expected job report, markets have shifted the expected size of first cut from 50bps to 25bps. It is also possible for Fed to push back against the aggressive rate cut, resulting in higher yields.
Morgan Stanley: Yields differentials between US treasuries and Japanese bonds have collapsed after the policy hike of the Bank of Japan and weak job data in US. We think Japanese stocks are oversold and the yen carry trade still has room.
Economy
UBS: Fed shifted its focus toward supporting growth due to the steady inflation and uncertainty in economic activities. We believe the Fed will frontload rate cuts with 100bps easing by year-end. As returns on cash will decline, investors should consider investing in high-quality bonds instead of cash and money market.
J.P. Morgan: Consumer spending has been financed by real wage growth but not borrowing, and corporates are still spending cash they saved during COVID. Despite recent volatility, consumer spending looks durable, indicating resilient growth.
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DISCLOSURE
This newsletter is meant for informational purposes only and is not investment advice. Always consult a licensed investment professional before making important investment decisions. Advertising and sponsorship do not influence editorial content or decisions. Market Hedwig is not responsible for the promises made or the quality or reliability of the products or services offered in any advertisement.
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