2024.08.19 Weekly
There seems to be some consensus that further market gains will be strained by elections-related uncertainty/volatility.
I’m somewhat skeptical given resilient fundamental drivers and the objectives of both candidates likely to extend that resilience.
More thoughts on elections below. Lets start by taking stock of recent developments and how my views are shaping up.
Data review
Favourable set of inflation data last week — while the slight uptick in July CPI was in-line with expectations, the yr/yr number came below expectations of 3% at 2.9%, making it the slowest pace since March-2021; PPI was softer than expectations and lower than the prior month.
Non-seasonally adjusted, 3-month annualised core CPI is now in deflation and PPI measures is at the slowest rate since the beginning of the year.
A good US retail sales report — big headline beat of +1% vs +0.3% expected is slightly distorted by a downward revision to June from -0.2% from 0.0%, but the Control Group gaining +0.3% vs +0.1% expected and on top of a strong +0.9% in June signifies the consumer is still in good health.
Rewinding the unwind
For many weeks (Rewind the unwind, part deux, part III) I noted reasons on why a continued unwind (the deleveraging in concentrated tech, long tech / short-small caps theme, vol dispersion, and Yen-funded carry trades) could soon run out of legs. I did underestimate however the extent of those flows which had costed my progress in July, giving back all gains booked from the initial JPY unwind and equities sell-off.
Even so, I stuck to my views and it wasn’t until the last extension of those moves which gave me even greater conviction — recession narrative was excessively premature; and the sell-off carried over into a Monday (Aug-5th) to meet the criteria for a robust ‘Turnaround Tuesday’ setup.
In the aftermath of those moves, the market has steadied itself — USDJPY stabilising just above this key pivot region, RUT/NDX mean reverted, and Nasdaq-VIX back to levels that preceded the NDX sell-off from above the 20k handle.
Election risks
We’ve just had a huge bout of volatility that makes me wonder whether seasonal trends hold up particularly as it seems to have come a little early. Meanwhile, with data proving more resilient than feared, and a washout in concentrated positioning has cleared out potential for more volatility, election risks will probably be the next most likely source, which comes with some historically compelling stats — September being the worst month in election years.
But I have some skepticism that these elections will significantly upset markets as neither candidate is pushing for any fiscal austerity and in-fact looking at ways to boost the economy even further to counter the so-called ‘cost of living crisis’ in the case of Kamala Harris, and to counter the alleged economic damage caused by Democrats in the case of Trump. The issue of high deficit spending should pose some market risks if those policies come to pass, but that is still some ways away to be concerned about at this point, and staying grounded to the present — assuming disinflation and labour market resilience continues, the Consumer should feel less burdened via improving real incomes and the ‘cost of living crisis’ may already be past its peak of which inflation data emphatically points to.
Though prospects of Harris becoming the next POTUS is likely to cause more volatility than Trump, I find it difficult to argue for significantly negative risks from either election outcome and believe the next few months will be a vol-sellers market. Time will tell whether the incoming data and market agrees…
Looking ahead
Jackson Hole seen to be the key event this week but I doubt Powell will signal anything which, if anything, could skew risks to the downside for equities and STIRS as he disappoints those seeking confirmation of several cuts regardless of elections. I think JH will be a rather boring affair and see Thursday’s claims and PMI’s as well as retail sector earnings to be far more interesting.
In fact, I don’t see what upsets markets til the next round of labour market reports in September and think fading any event volatility is the way to go.
Some interesting names this week that should help us to understand the trends in consumer demand and spending, especially after the solid retail sales report that showed strengthening demand in bigger-ticket categories and Walmart earnings last week whose CEO said they “aren’t experiencing a weaker consumer overall”.
Current trades
staying heavy long NAS and AUD and see no reason to square up yet or adjust view — macro and technicals all pointing in the right direction (as posted on X)
Long NDX — started nibbling on the Friday and following Black-Monday lows, and confidence was gained on the ensuing price action and signs of panic beginning to clear. I think high quality growth will continue to lead markets and even outperform small-caps. Can NDX restore their relative dominance?
Long AUD via AUDJPY AUDCHF and EURAUD — fading slowing-growth /recession concerns looking for commodities to mean revert after getting extremely oversold after the last few months. The bounce in Copper is very encouraging while Energy looks to have carved out a base for the year. AUD versus the usual funders is at a key inflection point but I think it will continue higher — AUD economy is another in G8 that’s proving resilient, chatter on China stimmies and cash-handouts, and mean reversion in commodities underway.
All for now, good luck trading!
