Weekly Market Update (July 28, 2024)

HIGHLIGHTS

A sharp decline in US equities this week, mainly driven by the AI trade unwind and lower-than-expected earnings in luxury. Rotation from large caps to small caps remains, and the difference between Russell2000 and S&P500 hit the highest level in over 20 years, increasing more than 9% in a month.

GDP: The US gross domestic product (GDP) estimate of 2.8% is stronger than the projected 2%, reinforcing the view that the Fed can wait until September to cut rates. The pressure on front-end yields was reduced. 2Y yields are still higher than 10Y yields, which 2s10s curve is at -18bps, improved from -50bps in the previous month.

Yen: Japanese yen jumped this week as market participants expect rate hike from the Bank of Japan (BoJ) in the coming week. There was a large amount of unwind in FX carry trades on Thursday, pushing USDJPY to around 152. Markets expect BOJ to hike rate to 0-0.25% and cut Japanese government bond purchases significantly.

Europe: Purchasing Manager Indices in the eurozone reported weaker than expected. Markets are increasingly concerned about the uncertainty in European growth since they are sensitive to potential US tariffs. Economists are expecting lower GDP growth in Europe.

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MARKETS

Nasdaq	17,357.88	-2.08%
S&P 500	5,459.10	-0.83%
Dow	40,589.34	+0.75%
10-Year	4.20%	-4bps
Brent	79.67	-3.55%
DXY	104.33	-0.03%

*Data as of market close. 5-day change ending on Friday.

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VIEW FROM THE STREET

Equity

Morgan Stanley: We could see the rotation from large caps to small caps. As the clarity in the market is increasing, such as the timing of first rate cut, disinflation, election and odds of soft landing, markets have started to broaden and rotate toward small caps. However, we recommend large cap quality cyclical stocks instead of small caps as they benefit more from falling rates, weakening dollar and steepening curve. We believe they have stronger potential growth and earnings by their operating leverage.

Goldman Sachs: Tech-heavy Nasdaq dropped by 3.6% on Wednesday, marking the largest single-day drop of the year. Despite reporting strong revenue numbers, mega-tech stocks still dropped as markets are concerned about the uncertain impact of AI investment and the decline in excitement.

Fixed Income

UBS: Investors are preparing their portfolios for low-rate environment. More excess cash will be deployed into high-quality bonds, including both corporate and government. Bond ladders could be a good strategy for capital preservation.

Morgan Stanley: Whether the long-end yield will follow the short-end lower remains controversial, given the likelihood of a September first rate cut is increasing. As the odds of a Republican win are increasing significantly, investors are concerned about the scenarios of higher deficits and increasing inflation pressure. We remain underweight in bond duration.

Economy

J.P. Morgan: The rebound in IPO activity is favoring private equity (PE) markets. It is supported by the strong Q2 earnings of major banks, mainly driven by the increase in investment banking revenues. However, exit activity may take longer to return to normal as the drop in interest rate is slower than expected.

Goldman Sachs: Central banks are easing their policies in some major economies. Bank of Canada cut rates by 25bps for the second time. People’s Bank of China also cut its open market operations rate by 10bps and medium-term lending facility rate by 20bps. Bank of England is expected to cut its rate by 25bps next week.

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KNOWLEDGE TRANSFER

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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.