2024.08.26 Weekly
Views are largely unchanged and do feel a reasonable level of conviction and clarity on the market so keeping this short again — quick review of last week’s events and how the market is shaping up after the ‘Rewind the unwind’ thesis has just about fully played out.
Data review
Flash PMIs driven predominatly by Services remains steadily upbeat and likely to dampen some slowdown concerns.
Other notable observations sees France with a big improvement perhaps reflecting businesses seeing lesser political risks, and the UK is the only country in this set seeing an expansion in Manufacturing.
US jobless claims printed in-line with expectations — initial claims continue to hold steady around the past 3-month average at 230k. On a non-adjusted basis however, it is back to the low-end of the post-pandemic range, and well below the pre-pandemic 5yr average (dashed-line).
Lastly on FOMC minutes and Jackson Hole — I don’t see any new developments from what we didn’t know already, which is the Fed’s focus having shifted from inflation to the labour market.
Market had a dovish reaction to Powell’s JH speech after paring back on rate cuts earlier in the week. Cuts are more than fully loaded, assuming the labour market doesn’t cave by the end of the year, with 85bps priced over the next 3 meetings, and 25bps at each of the next 8 meetings.
The unwind rewound…
The rewind the unwind thesis continues to hold up with the action proving that there was nothing really different at a fundamental level to warrant such a sell-off and, that it was simply a wash-out of heavily one-sided positioning across the board and asset classes.
SPX has fully recovered the sell-off back to within less than 1% of all-time-high, and volatility is stabilising with no forseeable catalysts as far as I can see for another spike.
Ratio of EPS revisions turned positive the past month with BofA’s 3-month Earnings Revision Ratio reaching a 29-month high to throw some doubt on a earnings-recession narrative.
Looking at the regional m/m breakdown, it is interesting to note that negative m/m change in July was only temporary, much like the premature recession scare and market volatility is proving to be.
Yen fixed weight currency index has been consolidating in recent weeks but volatility remains somewhat elevated compared to equities vol as well as rates vol (Move index) not going too crazy on the recent washout.
Downside in commodities have gotten extremely stretched and has mean-reverted with ease. Price action is looking constructive, as is the sentiment that seemed overly worried about a recession. I think the ongoing recovery in commodities will help to stabilise the volatility in JPY and rates that was mostly right-hand side driven.
Looking ahead
Not much that I see which could upset the current flow of the market.
Durable goods which has just come out as I write this came in with a huge beat — I had a hunch this would come in very strong given the pick up in demand for bigger and more durable categories signaled by recent price reports. I also don’t see any downside risks to Jobless claims and PCE either with some temporary weakness associated with the Hurricane behind us and while other data continues to suggest the economy remains stable.
NVDA earnings release could be seen to be the most important event this week as the market gauges the impact of delays on the industry. But again, after some bright spots in recent retail sector earnings reports, I don’t see meaningful downside risks for now.
Trading views
Staying core long risk from buying into the sell-off, and see no reason to change view. Elections could be a risk but I have my doubts about that as noted in last week’s note.
I also like cyclical commodities to continue rebounding. Sentiment appears far less ‘doom and gloom’ compared to prior months with some earnings reports and economic data backing up a stable growth outlook, on top of the Fed easing cycle about to get underway.
Seeing that USD is starting to look very oversold and US rates overbought — I like trading around a long USD theme this week via EURUSD shorts and USDJPY longs.
EURUSD 2yr real rate spread has stopped moving against the USD’s favour and essentially unchanged since the beginning of August and not backing an extended rally in the Euro…
and while there might be an easing bias to US rates, with the growth outlook looking stable and rate cuts priced in as much as reasonably possible for now, I see risks tilted to the upside in US yields especially if there is more favourable economic data this week and commodities continues its rebound.
That’s all for now — good luck trading!
