HIGHLIGHTS
US equities were down this week, mostly driven by the underperformance in semiconductors. Small-cap stocks dropped with the broader market after the rally later in the week. Volatility in equities hit a 3-month high, and the 10Y yield went up slightly.
China: Policymakers in China discussed the outline of economic aid during the Third Plenum this week. However, the markets reacted badly because of the lack of detailed execution plan and big miss in Q2 GDP. The slowdown in GDP reflected the decline in retail sales and extended housing market contraction.
Trump: With the increasing odds of a Trump victory, markets are interested in the macro implications of the policies he proposes. Markets project that Republican win would bring a stronger dollar, higher yields and a slight jump in equity. Meanwhile, a Democratic win would result in a weaker dollar, higher yields and a modest decline in equity.
Fed: The economic data this week indicated the ongoing resilience in demand, which is in line with what Fed wants to see if they have to initiate rate cuts. Fed officials also commented that Q2 inflation data is closer to the disinflation trend they are looking for.
MARKETS
17,726.94 | -3.65% | |
S&P 500 | 5,505.00 | -1.97% |
Dow | 40,287.53 | +0.72% |
10-Year | 4.24% | +5bps |
Brent | 82.60 | -2.83% |
DXY | 104.36 | +0.27% |
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Equity
Morgan Stanley: Profit margins become the focus in the Q2 earning season as it is the driver of earnings growth amid the backdrop of low volume and weak pricing power. Small caps are facing headwinds because of the high financing costs and limitation of scale. Margins could stabilize soon if small caps rally on rate cuts.
UBS: US equities pulled back, mainly driven by the tougher restrictions to prevent China from accessing semiconductor technology. The policy is to restrict chipmakers such as ASML, Tokyo Electron from exporting their products to China. We recommend to diversify exposure across the tech supply chain to mitigate idiosyncratic risk.
Fixed Income
Standard Chartered: We recommend a tactical buy on Euro government bonds with currency hedged. It is expected that the yield premium between German and French government bonds to narrow due to the stabilizing French political environment. Also, a rating downgrade is unlikely in short term as the next review window is a few quarters away and rating agencies will wait for the first post-election budget to evaluate fiscal risks.
Morgan Stanley: Although the yield curve inversion has persisted for 29 months, it is expected that the rate cut cycle will support the start of curve steepening. Investors are recommended to balance their duration exposure.
Economy
J.P. Morgan: Due to income inequality, consumer spending would drop and investing would increase. The rich households are saving more and investing in financial products instead of spending on goods and services. This could be the main reason for the equity rally in first half year given the slowdown in spending.
UBS: Although extreme right or left-wing parties have not yet taken control of the world economy, voters may seek answers at the fringes if they are not satisfied. It may result in volatility in currency and local equity, with increasing risks of higher inflation, taxes and interest rates.
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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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