Breakfast Bites - New

Rise and shine everyone.

A tough market yesterday, with severe selling across the board. The window of weakness that we’ve been talking about seems to have taken hold. The S&P 500 had its first 2% down day in 356 days but bounced a little bit off the 50-day moving average.

The Nasdaq 100, on the other hand, blew through its 50-day moving average with the worst session since October 2022. There was significant de-risking across the Mag 7, led by Tesla and Meta. We kind of saw this coming, particularly after the Netflix reaction but, this was still quite extreme. Meta’s price was a reaction to softer YouTube numbers from Google.

What’s interesting though is that US Treasury Yields didn’t move much yesterday and neither did the US Dollar. This market reaction was driven more by fundamentals, earnings, and de-risking. AI stocks were down after Google and Tesla did not guide to incremental CapEx spend on AI.

When I used the term “de-risking” over the last week, I was told this is more de-grossing by the Hedge Funds. But, that’s not the case anymore. This is outright selling.

The selling spread to Asian markets this morning as well, with the Nikkei down -3% at one point. Chip stocks (Tokyo Electron, SK Hynix) were down. Over in Australia, we saw some of the resources companies get hit, more so after we heard reports from US mining, which were not great.

Europe also saw heavy selling in the market this morning. Tech and AI are being sold but, as are other companies that were linked to themes.

Everything continues to be red this morning other than NatGas and Bonds. Yields are still lower and we may be seeing some rotation into bonds here for safety.

Big Focus Today: US Q2 GDP Growth

The big item to look out for today will be the US Q2 GDP Growth Advance Estimate. The consensus is 2%. The last Atlanta GDP estimate is 2.6%, as of July 24, 2024.

The final Q1 numbers that came out were 1.4%, a slight increase from the second estimate of 1.3% but a decrease from the first estimate of 1.6%.

The market is already on edge and a miss may just exacerbate the selling. The opposite is also true, of course. A better than expected number may stop some of the selling.

We will also be looking at clues for tomorrow’s PCE inflation number. We get the quarterly PCE spending number today with the GDP and that often gives us some direction as to where we may be headed.

Bank of Canada just cut again

The Bank of Canada decided to cut their policy rate yet again yesterday, by 0.25% to 4.5%. This is the first back-to-back cut that we’ve seen for a major DM economy. While the US is not in the same situation, a cut from BoC, and from the ECB puts pressure on whether the Fed should start getting ready to ease. The Bank of England also has a rate meeting on 01 Aug and the consensus has long been for a cut. But, inflation continues to remain sticky there and it remains to be seen whether they start their easing cycle. If they do, that’s added pressure on the US.

South Korea’s Economy Contracts

South Korea's economy contracted by 0.2% quarter-on-quarter in Q2 2024, missing the forecasted 0.1% rise and marking the first decline since Q4 2022. The contraction was driven by a 0.2% fall in private consumption, a 1.1% drop in construction investment, and a 2.1% decrease in facilities investment. Despite these declines, exports grew by 0.9%, and imports rose by 1.2%, with government consumption also increasing by 0.7%.

This was an unexpected outcome and with the pressure on tech stocks, this certainly not helping the Kospi. We were just starting to see some positive momentum and that’s now reversed. The EWY has sliced through the 50-day moving average as well.

Chart of the Day

Since May, the Bloomberg US Corporate High Yield OAS (option adjusted spread) has not confirmed higher highs for the SPX, indicating a tactical bearish divergence. However, the credit spread remains narrow, which is a positive sign.

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)